As one official explains: "We had a strong book so why take risks in these markets. The Nasdaq had fallen 6% on the Wednesday and there was a danger that further volatility would scare off investors. In the end, the Nasdaq only dropped about 1.5% on the Thursday and Taiwan remained pretty firm."
Pricing of the five-year deal came at the mid point of indicative terms with a higher end yield compensating for a more aggressive conversion premium. With an issue price of par, the deal has a zero coupon structure, with a put in year two at 110.86% to yield 5.22% or 100bp over Treasuries. Yield-to-maturity is 4.347%, with redemption at 123.99%. This represents the outer end of an indicative range of a 109.22% to 110.83% put price, equating to 25bp to 100bp over Treasuries. The bonds are also callable from year two at par subject to the 135% trigger.
Where the conversion premium is concerned, the deal was marketed under a 15% to 20% range and came at 17.5% to a spot price of NT$38.20. Conversion is into common shares as the company does not have any outstanding DR's and there is also a $20 million greenshoe. Co-lead was Sun-Fun Securities, with Chinatrust and Nomura as co-managers.
Underlying assumptions comprise a bond floor of 94.5% based on a credit spread of 300bp to 325bp over Libor and fair value at 104%. This reflects an implied volatility level of 23% and historic (100) day volatility of 62.5%.
Bankers report allocations to about 90 accounts, of which about 60% comprise outright buyers, 25% equity buyers and the remainder a mix of fixed income and hedge funds. By geography, the book was said to be split 60% Europe, 25% US and 15% Asia.
"The great thing about this deal is that it represents the tightest terms the company could have got all year," one observer comments. "Had the deal come in January, it's possible that ProMOS could have achieved a yield-to-put of about 75bp over Treasuries. But the fact is that Treasuries are now lower than they were in January and the company is issuing off a higher share price. Unlike the rolling put structures, the company has also got more security of proceeds, because it's effectively been able to extend out two years."
The nearest recent comparable is, therefore, the $175 million convertible for Acer Communications & Multimedia led by Salomon Smith Barney in mid-February. This also has a two-year call and put structure and is currently trading on a yield of 4.407% and premium of 27.3%, although the downward re-fixes incorporated into the deal bring the effective premium lower.
"The crux to the deal was investors' view of the DRAM cycle," one banker reports. "Do they believe that recent price rises represent a small blip, or is this a sign that the sector is starting to turn? Our house view is that inventory is being cleared and that we'll see an upswing over the next six to 12 months. Other firms obviously have a more bearish view and believe that it won't happen for another 12 to 18 months."
Some 95.4% of the company's net revenue is derived from the sale of commodity DRAMs, of which virtually the entire amount is sold to the company's two major shareholders Mosel and Infineon of Germany. Earnings are, therefore, highly sensitive to global price fluctuations, with 64Mb DRAM prices falling from $8 to $3 per die over the second half of 2000. They have since rebounded to a $4.20 level.
In the event that the market shows signs of weakness, bankers argue that the company's solid credit profile will underpin the convertible's secondary market performance. With a total capitalization of $1.682 billion, the company maintains relatively low gearing levels, with debt to capitalization standing at about 40.7%.
Year-to-date, the stock has also slightly outperformed the Taiwanese market rising 28.8% to Friday's close, against a 22.3% rise for the Weighted Index.
