Taiwan's Ritek Corp returned to the convertible bond market yesterday (Monday) with its largest and most aggressive deal to date.
With UBS as lead manager, the B+ rated credit raised $220 million from a zero coupon, five-year issue, which was priced at 105.16% and redeems at 92.73% to yield minus 2.5%. There is also a two-year put at par. This marked the tight end of terms comprising a yield of minus 2% to minus 2.5%.
The conversion premium was settled at 8% to the stock's NT$23.4 close, again the tight end of a 3% to 8% indicative range. The deal also incorporates three re-set options after nine months, one-and-three-quarter years and two-and-three-quarter years. The call option falls after one-year and has a 120% hurdle.
Underlying assumptions comprise a bond floor of 84%, theoretical value of 104.25% and implied volatility of 32%. This is based on a credit spread of 400bp over Libor, zero dividend, 5% borrow cost and volatility assumption of 34%.
Books are said to have closed over seven times subscribed, with participation by more than 200 accounts. Observers say part of the deal's popularity stems from a lack of recent issuance in Asia and particularly Taiwan, where there has been nothing since the controversial Presidential election of March 20.
Like Ritek's last transaction of September 2003, the new deal is also highly equity sensitive. The credit typically attracts little asset swap demand and in this case it was in the low single digits.
The conversion premium ranks as one of the lowest from Asia in recent years, but it allowed the company to achieve a longer put option than it typically has in the past and a much more aggressive yield. For example, its September 2003 bond led by Deutsche Bank raised $160 million and was priced at 101% to redeem at 101% yielding minus 1%.
There were put options after years one and two and the conversion premium was set at 10% to a spot close of NT$23. To encourage early conversion, there was also a make whole provision if the stock traded above 2%. This cost 2%.
Prior to this the group completed a $175 million convertible in January 2002 that had a coupon of 0.5%, three year put to yield 6.29% and conversion premium of 13% over a stock price of NT$40.13.
Neither of its previous deals are trading in the money. Investors are said to have liked the new deal because of the low conversion premium and were prepared to sacrifice some yield for a structure that should perform more quickly.
Both the stock and credit are currently on an upward trajectory. One week ago, Standard & Poor's raised the company's outlook from stable to positive. It did so because of improved operating performance and a better industry outlook.
Net income, for example, has turned from an NT$3.8 billion loss in 2002 to an NT$1.3 billion profit in 2003. Net debt to equity currently stands at 31%.
In terms of stock price, the counter is up 11.43% year-to-date, but has only started to perform in mid March after hitting a year-to-date low of NT$13.8. It is trading on a 2004 P/E of 11.94 times.
