Solar Applied Materials brings $115 million CB

Taiwanese hi-tech metals manufacturer Solar Applied Material Technology on Friday raised $115 million from the sale of convertible bonds, making it the fourth Asian company to tap the CB market in the past couple of weeks. While most of these issues have been small, they suggest the market will remain busy as companies continue to take advantage of the fact that interest rates are still relatively low. Outright investors are also quite keen to get some downside protection on their investments as markets remain volatile.

In the first half of the year, companies in Asia ex-Japan raised $14.1 billion from the equity-linked market, according to Dealogic, which is up 29% from the same period last year and the second-highest first half total on record after the $15.5 billion that was raised in the first half of 2007. That compares with a 3% decline in overall ECM volumes to $96.5 billion.

Notable deals pushing up the equity-linked volume include Lotte Shopping’s $900 million dual-currency CB, Wharf Holdings’ $800 million Hong Kong dollar-denominated CB, and Sinopec’s $3.5 billion domestic CB that is convertible into the company’s Shanghai-listed A-shares. Taiwan issuers have also been active with seven deals raising a combined $2 billion so far this year, including a $500 million offering by United Microelectronics that was linked to the new Taiwan dollar and came with a negative yield, and a $400 million offering by Apple supplier TPK Holding.

All of the Taiwan deals have come with a zero coupon and, aside from Asia Cement, which offered a 0.3% back-ended yield, they have had no yield either. (As mentioned, UMC even priced at a negative yield).

And Solar Applied was no exception to this trend. Its five-year bonds, which featured a three-year put and a three-year issuer call with a 120% hurdle, offered zero coupon and zero yield. They were also marketed with a relatively high conversion premium ranging from 28% to 31% over Friday’s closing price of NT$72.70.

One key reason why Taiwan issuers can get away with such tight terms is the fact that domestic banks are happy to provide asset swaps that allow the bondholders to hedge the credit. According to a source, Solar Applied has a strong following among the local banks and swaps were available at a 150bp spread over Libor. There was also some stock borrow available in the market.

However, the source noted that the demand was split 50-50 between hedge funds and outright investors, and in the end about 70% of the deal was allocated to outrights.

While there isn’t much research on the company, which has a market cap of about $750 million, investors supposedly like the stock because it offers exposure to a different part of the technology value chain. Solar Applied specialises in a material called sputtering target, which is a type of thin film used for coating of metal disks like CDs and DVDs, as well as hard disks, and according to its website, it ranks as the largest target manufacturer for the optical data storage industry with a 40% market share. Most of the other players in this part of the value chain are privately owned companies in Europe and Japan.

After a dip in the first 10 weeks this year, Solar Applied’s share price has gained 17%, including a 4.2% rise in the past three days, and is now close to its 2011 high of NT$73.90 that it reached in late January.

Those gains, in combination with the relatively high conversion premium – of the six equity-linked deals issued in Asia ex-Japan since the beginning of June, only GDH Limited’s exchangeable into Guangdong Investment has priced at a premium above 25% -- meant the demand was quite price sensitive and the premium was fixed at the investor-friendly end, at 28%.

This resulted in a conversion price of about NT$93.10, a price the company last traded at in August 2008. Even so, the deal was said to be covered quite quickly and by the time it closed, about 30 investors had submitted orders. The demand was also strong enough for the bookrunners to exercise the entire upsize option, increasing the deal to $115 million from a base size of $100 million.

At a credit spread of 150bp, a stock borrow cost of 3.5% and a full dividend pass-through, the bond floor worked out at 92.4% and the implied volatility at 27.5%. The latter was quite high compared to a 10-day historic volatility of just 23%, although on a 500-day basis the volatility has been more like 32%.

According to market participants, there were no grey market quotes, which may have been due to the fact that the deal was in the market on a Friday. Most investors were also focused on the US payroll data due later that evening.

The deal was led by Barclays Capital. This is the bank’s fourth CB so far this year and shows that it is keen to become more active in the Asian CB market again after a few quiet years – it hasn’t featured in the top-10 in the equity-linked league table in the region since 2007 when it ranked ninth. The recent pickup in activity comes as the bank is also trying to build an equities franchise in Asia to match its equities business in the US that it bought from Lehman Brothers in 2008. The bank has been hiring aggressively across equity origination, sales trading and research in the past couple of years and earlier this year re-located Nick Smith from London to head up its CB team.

Solar Applied is Barclays’ second deal as sole bookrunner so far this year, after the $280 million deal it led for Epistar Corp, a Taiwanese manufacturer of light emitting diode (LED) chips, in January.