An increased $175 million issue was priced overnight by lead manager Merrill Lynch on Wednesday. Coming up against unexpected volatility in US tech stocks, the lead nevertheless managed to close books three-and-a-half times oversubscribed after a five-hour marketing period.
Pricing of the deal, initially envisaged at $150 million in size, came at the mid point of its indicative range. The coupon was set at 1.75% against a 1.5% to 2% range and the conversion premium at 20% to Wednesday's S$2.84 close, against an indicative range of 17% to 23%.
The five-year deal also has hard no call for two years, thereafter subject to a 125% hurdle and a three-year put. This was priced at 110.081% to yield 4.19% or 90bp over Treasuries. Redemption is at 117.665%.
Alongside the lead Deutsche, Nomura, OCBC and UOB were co-managers.
Underlying assumptions comprise a bond floor of 87%, theoretical value of 107% and implied volatility of 27%. This is based on a credit spread of 475bp over Libor, zero dividend, 400bp stock borrow cost and volatility assumption of 45%.
Outside observers have mainly congratulated the lead on achieving tight terms, particularly where the bond floor is concerned. Says one, "For a stock which has virtually no borrow, this has to be something of a record in Asia.
"It's been achieved," he continues, "by playing off a wide credit spread with aggressive pricing on the equity option. It's quite a good structure for investors that want to play the upside on the stock and the tech sector. They feel protected by the credit spread and are therefore willing to pay a bit more for the equity option."
Similar to the controversy which surrounded Merrill's pricing of a convertible for Chartered Semiconductor almost a year ago to the day, credit spread assumptions for Singapore tech related companies are never straightforward. Unlike Taiwan, where the domestic banks bid aggressively for tech credit and understand its nuances, the Singaporean market is said to be far more shallow.
Some bankers also add that ST Assembly has a much weaker balance sheet than its nearest sector comparable Siliconware Precision Industries (SPIL), the region's largest IC testing and packaging company. Earlier this January, SPIL launched a $175 million five-year deal based on credit bid of 325bp over Libor for two-and-a-half year paper.
"STATS doesn't have a problem with its gearing per se as the company is in a net cash position," one analyst explains. "The main problem lies with its operational cash flows. Fixed costs are very high and over the last quarter, for example, the company suffered depreciation costs of $30 million against revenues of $34 million."
Analysts also add that while the company is moving in the right direction, it is still too exposed to revenue from its testing operations and is too concentrated on the communications sector. "About 46% of its revenues last year came from testing and it needs to build up its packaging capabilities since these do not require such high overheads," the analyst continues.
"The company also derives a lot of its revenue from the communications sector," he concludes, "although this has declined from 71% to 52% over the past year."
With a revenue mix of 78% US, 13% Europe and 9% Asia, STAT's fortunes are highly geared to the US tech cycle and broader economic recovery. Year-to-date, the stock is up 27.4%, outperforming both the Straits Times Index and the Philadelphia Semiconductor Index, which closed Wednesday up 11% on the year.
Supporters say that funds believe the stock still has considerable upside from current levels, citing the participation of Scottish value funds. With a book said to be dominated by outright funds and a handful of equity funds, a total of 95 accounts participated.
Pre-deal, STAT's was 71.9% owned by the Singapore Technologies group and a market capitalization of about $1.5 billion. Aside from its tight pricing and stable aftermarket performance, one of the key achievements of the deal will have been to increase the company's $450 million free float. On full conversion, the new deal adds a further 35%.
