The pricing of a $175 million convertible for Ritek Corp yesterday (Tuesday) sees Credit Suisse First Boston complete its first Taiwanese convertible in a number of years. Although the bank ranks as one of Asia's strongest equity-linked houses, Taiwan has always been a noticeable chink in its armour and one that it needed to rectify given the expansive pipeline of tech deals coming out of the Island Republic.
However, market observers believe the bank had to work hard to make its deal a success as there is only a very limited credit bid and no borrow in the BB- rated company whose stock has underperformed Taiwan's tech rally. Consequently, most competitor banks factored in a credit spread of 500bp in their valuation models on the basis that all the asset swap demand had been eaten up by the company's previous deal.
Launched in April 2001, this $210 million five-year offering with two and three-year call and puts is still trading out-of-the-money, because the stock has not performed and was quoted yesterday on a premium of 94.5% and yield-to-maturity of 4.269%.
But the lead is said to have done extensive credit marketing of the new deal, approaching all the Taiwanese banks and building up a book that was strong enough to satisfy accounts contemplating buying the deal. "Other international banks may not be making a bid on this paper, but that's because we've been out there for four weeks and made sure we got all credit bids tied up," says one participant. "There is no way the deal would've been launched if the bid wasn't there."
The final order book is said to have closed 1.5 times oversubscribed with a total of about 100 accounts and a geographical split which saw 50% of paper placed in Europe and the remainder split equally between the US and Asia.
Pricing came with a 0.5% coupon, 13% premium to a volume weighted average price of NT$40.13, or a 12.2% premium to a closing price of NT$40.40. The deal has hard no call for three years and thereafter subject to a 130% hurdle and a put option in year three at 250bp over Treasuries to yield 6.29%. The deal redeems at 133.41% and there are also re-sets in 2004 and 2006 subject to an 80% floor.
Alongside the lead, JPMorgan acted as joint-lead, with ABN AMRO, Barits Securities and Citicorp as co-leads.
The underlying valuation sees a bond floor of 93.73% and fair value of just over 110% with implied volatility of 18%. This is based on a credit spread assumption of 430bp (the outer end of a 375bp to 430bp range in the market), 40% volatility, 5% stock borrow cost and 0.9% cash dividend yield.
The most notable aspect of the deal for many equity specialists is the put option, which has been successfully extended out to three years - the first time in two years bar ING Baring's successful precedent with Premier Image last September. Some noted, however, that while Siliconware Precision Industries (SPIL) cleared the market with a 2.25% yield for a two-and-a-half year put last week, Ritek has had to pay considerably more to achieve the additional six months.
"This deal would always have a different valuation to something like SPIL because there's no borrow available," notes one observer. "Ritek's Finance Director was also prepared to pay a little bit extra to achieve the additional maturity. For a volatile tech company, any extension to its working capital makes good corporate finance."
One thing that bankers say has become apparent over the past few weeks is a noticeable tilt towards those investors looking for more equity performance, albeit within relatively defensive structures. Where Ritek is concerned, analysts and bankers remain split about potential upside on the stock, which is up 7.16% year-to-date.
Some analysts highlight Ritek's dominant market share in CD-R (compact disc recordable) and DVD-R (DVD recordable), allied to flexible manufacturing facilities which allow it to re-configure its product mixes ahead of competitors. Others, however, note that the whole industry has been subject to a price war since November as smaller competitors such as CMC-Magnetics try and eat away its market share.
Separately, Deutsche Bank and Merrill Lynch are preparing to launch a convertible for DRAM manufacture Macronix. Based on a fixed number of 189 million shares, this will raise $150 million (pre greenshoe) at current prices.
