A $190 million exchangeable by International Commercial Bank of China (ICBC) into Cathay Financial Holdings was completed after London's close on Monday by joint leads Goldman Sachs and Lehman Brothers.
The deal attracted huge demand even after individual orders were capped at $20 million and closed at $3 billion, equating to an oversubscription rate of nearly 17 times. This easily beat Taishin Financial Holdings, whose $180 million deal closed eight-and-a-half times covered in mid-April under the lead of Citigroup.
Both deals underscore the advantages of marrying patchy primary markets supply with the huge liquidity washing around the credit markets. However, some bankers have criticized the terms on both deals for not being aggressive enough and especially since they immediately bounced in secondary market trading, with ICBC hitting 102.5% within a day of launch.
But, many also believe that successful deals offering investors a decent return, set a good platform for those that follow at a time of difficult conditions. Taishin, for example, has now settled around the 104% level, whereas many of the year's tech deals still hover around or below par.
With a five-year final maturity, ICBC's deal priced on a zero coupon, conversion premium of 32% to a spot close of NT$39.6 and redemption price of 105.11%. There is a two-year call option with a 125% hurdle and two-year put at 102.01% to yield 1%. This was tightened from initial guidance of 1.25% to 1.5%.
Alongside the leads, Barits Securities and Grand Cathay were co-managers and there is also a $28 million greenshoe.
Underlying terms comprise a bond floor of 97.2%, implied volatility of 20.8% and theoretical value of 104.15%. This is based on a credit spread of 90bp over Libor, zero stock borrow, 2% dividend yield and volatility assumption of 30%. ICBC only had partial dividend pass through since the stock currently yields above 3%.
By contrast, Taishin similarly priced with a five-year maturity and redemption price of 112.68%. There was a three-year call subject to a 130% trigger and three-year put at 107.42%. The deal had a bond floor of 95%, implied volatility of 23.1%, theoretical value of 103.4% and credit spread of 170bp.
The main difference between Taishin and ICBC is a ratings-based one, although there is also a one-year maturity differential. Taishin has a Baa3 rating, while ICBC has an A rating from Standard & Poor's, largely because of its partial government ownership.
Observers say that while there was an asset swap book for the entire deal, most outright funds allocated bonds wanted to hold both parts of the deal. In total, just over 300 investors are said to have placed orders, with a roughly even geographical distribution split between Europe and Asia.
The most striking feature of ICBC's deal is the exchange premium, which sets a new record for conversion into common stock. The SAR's related worries, which have plagued the TWSE, were not factored into pricing and indeed Cathay remains up 7.32% on the year, although it is still down from its NT$47 highs of late January.
The exchangeable monetizes ICBC's outstanding 1.7% stake in Cathay and one of management's key aims was said to have been to push the exchange premium as high as possible.
