Lehman Brothers priced Asia's second convertible of the year yesterday (Wednesday), with a $150 million issue for TFT-LCD manufacturer Quanta Display.
Following a couple of weeks of soft marketing, the deal received final SFC approval on Tuesday, allowing launch to take place the next day under an accelerated one-and-a-quarter hour bookbuild. In the face of critics who believed that a large deal from a weak sector would struggle to attract demand, Quanta managed to amass total demand of $1.6 billion, with participation by 170 accounts.
Final terms comprise a five-year final maturity with a zero coupon, zero yield and par redemption structure. The deal is callable after two-years subject to a 125% hurdle and puttable at par at the end of years one, two and three. The conversion premium came at the aggressive end of a 14% 19% range and was priced at 19% to a spot close of NT$13.9. There is also a $30 million greenshoe. On full conversion, the deal accounts for 20% of the market cap and roughly 37% of the freefloat.
One of the most interesting aspects of the transaction is its use of re-set options. The first re-set after six months subject to an 80% floor has been used before, but the second marks a new departure for convertible structures in Asia. This re-set kicks in should Quanta Display proceed as planned with a 410 million new share GDR offering via UBS Warburg, originally scheduled for the first half of the year. If the GDR does take place, the conversion price will automatically be re-set to the DR price plus 19% conversion premium.
The structural twist makes the deal an attractive bet for hedge funds, which believe a GDR is likely and in some respects the new deal mirrors a similar successful strategy adopted by Lehman for a UMC exchangeable into AU Optronics completed in May 2002. At the time AU had yet to be listed on the New York Stock Exchange and therefore had no stock borrow available.
Underlying assumptions for Quanta Display’s deal comprise a bond floor of 96%, theoretical value of about 107.61% and implied volatility of 19%. This is based on a credit spread of 250bp over Libor, 35% volatility assumption, zero dividend and currently zero stock borrow.
The second key aspect of the deal is the bond floor. Should a GDR fail to materialize, funds are likely to have still been attracted to the deal because of the defensive bond floor and credit subsidy implied by a 250bp spread.
At the widest end of the spectrum, some convertible specialists quote Quanta Display at well over 400bp over Libor. Others argue that the halo effect of Quanta Computer, which has an implied investment grade rating, means that a roughly 75bp premium to the parent is aggressive, but acceptable. As it was, there was asset swap demand for just 20% of the book.
Geographically, the book was said to have split 20% Asia, 25% US and 55% Europe. Co-leads are Chinatrust, ICBC and Barits Securities.
Year-to-date, Quanta is up 18.3%, though remains at a historically low price to book of 1.4 times earnings. As such, the lead appears to have timed the deal extremely well, taking advantage of a pre Chinese New Year surge in positive momentum towards the Taiwanese tech sector. Bankers also point out that a number of investment banks have recently upgraded their outlook towards the notoriously volatile TFT-LCD industry, although two of the most recent - Morgan Stanley and Salomon Smith Barney - both have house clients in the sector - Chi Mei and AU Optronics. Many local bankers, however, remain divided over the sustainability of the rally, arguing that there is no visibility over panel prices and the rally is running ahead of itself.
