Repeating a strategy that proved successful last September, Premier is attempting to secure tight pricing by heading the autumn's pipeline of deals. Also similar to last year, when the company raised $56.4 million through a GDR, ING Barings is lead manager of what will represent the company's debut convertible.
Pricing will take place later today (Thursday), with terms comprising a coupon of 0% to 0.75%, conversion premium of 12% to 17% and three year put at 75bp to 150bp over Treasuries, equating to a yield of 4.7% to 5.45%. There is also three year hard no call, thereafter subject to the 140% trigger and re-sets in years one, two and three, with an 80% floor. National Securities is co-lead, with CLSA, Daiwa and Salomon Smith Barney as co-managers.
Two of the most notable features of the structure are the fact that the deal may pay a coupon and there is a three-year put. A number of specialists argue that the latter marks an aggressive step given the pre-summer pricing trends of the Taiwanese CB market, culminating in the extremely generous pricing of CMC Magnetics in late July. This deal had an extremely high bond floor of 95.6%, theoretical value at 115%, a put in year two at 113.75% equating to a yield of 6.55% and a conversion premium of only 11% that came down further with the inclusion of re-sets.
However, as one banker replies, "Convertible investors have become more risk averse, but sentiment is still quite positive for the right company and right issue and we're now only $1 billion to $2 billion short of 2000's record highs for global issuance. In this scenario, investors are looking for deals that will give them more time value. They want to play the sector through rather be sold something that 's puttable after a one or two year time frame.
"Rolling puts," she adds, "Are more necessary for shakier credits where investors demand higher bond floors. Premier Image is a company with hardly any debt and one that’s operating in an inherently less volatile business sector than the tech sector."
By contrast, most of the 12 deals launched pre-summer are trading out-of-the-money, with high yields and high conversion premiums. In terms of the latter, Chunghwa Picture Tubes has been the worst performer widening out to 154%, followed by Ritek on 94.7% and ProMos Technology on 71.7%. Averaged out, the 12 present a conversion premium of about 56%.
Where yield is concerned, there are few issues trading below 5%. At the widest end of the spectrum, companies hard hit by the semiconductor downturn such as ProMos have widened to a 12.9% level, while Powerchip is on 7.4% and Yageo 6.3%.
ING Barings, therefore, believes that outright funds will like the balanced characteristics of Premier's deal. Unsurprisingly in a bear market, the 20 convertibles launched out of Asia (ex-Japan) this year have lost investors less money than the 28 straight equity offerings. Of those 16 straight equity offerings that are down from issue price, the average drop has been 36.5%, while the average rise for the remaining 12 has been 43.83%. For convertibles, the average drop for the nine that have lost money is 5%, while the average rise for the 10 that have made it is 1.375%. One is still trading at par.
Underlying assumptions for Premier’s deal include a bond floor of 92% to 94% based on an credit spread of 300bp over Libor and fair value of 111% to 107% based on 35% implied volatility and 6% stock borrow. Historic volatility is 45% to 50%.
Year-to-date, the stock is up 60.11% to NT$48.3 (Wednesday) against an overall loss of 1.53% for the Taipei Weighted Index. Despite the run-up, analysts, nevertheless, believe that there is room for further upside.
As one puts it, “We have a target price of NT$68 on the stock and think there’s 36% upside from current levels. This is a company that’s growing by a Compound Annual Growth Rate (CAGR) of about 30% a year.”
He further adds that camera shipments are set to continue increasing dramatically during the second half of the year. While the company shipped about 135,000 units during the first half, it is estimated that the figure will rise to about 685,000 during the second half.
“Clients postponed orders until the second half, but they didn’t cancel them,” the analyst adds. “This company also occupies a unique space and will increasingly benefit from outsourcing of production by the big Japanese camera manufacturers.”
At the moment, Premier Image commands a global market share of about 8% in the context of a camera market that sees about 10% of production outsourced. A fifth of its production is also own-brand
With a market capitalization of about $550 million, it was listed on the main board at the end of 1999 and now comprises 0.2% of the index.
Lead managers argue that a strong equity story is matched by strong credit fundamentals, further underpinned by the presence of UMC as a company shareholder. The company has a debt to EBITDA ratio of 2.2 times (including the new CB), with an EBITDA to interest coverage ratio of about 35 times.
“This is a stable double-B credit,” says one observer. “In better markets, it would command a spread of about 250bp over Libor for three year paper, but at the moment it’s probably necessary to factor in a further 50bp or so.”
