Taishin FHC returned to the convertible bond market on Friday with a $200 million deal to offload its remaining Treasury shares ahead of the government's deadline. The Deutsche Bank-led deal closed massively oversubscribed in the process stirring up controversy among sector specialists.
Normally competition for Taiwanese mandates is so fierce that deals can be far too aggressive and sizeable chunks end up on the leads' books. But with Taishin, the reverse scenario appears to have been the case and specialists have questioned what motives Taishin management could have had for continuing with a deal that immediately shot up to a grey market price of 109% the moment indicative terms were released.
CB specialists say they expected the deal to be re-priced and when it wasn't, they report grey market quotes being pushed up to as high as 111%.
Terms comprised an issue price of par, zero coupon and redemption price of 98.88% to yield minus 0.75%. As the deal has an 18-month maturity, there is no put option, but a call option after one-year subject to a 130% hurdle. There is also a $20 million greenshoe.
The conversion premium was fixed at 14.29% to the stock's NT$32.2% close. This represents the tight end of an indicative range between 10% to 15% (conversion premium) and minus 0.25% to minus 0.75% (yield).
Underlying assumptions comprise a bond floor of 95.2%, theoretical value of 104.44% and implied volatility of 25%. This is based on a credit spread of 90bp over Libor, full dividend pass through, 5% borrow cost and 260 day volatility of 34%.
The most obvious pricing comparable is a $170 million Treasury share deal for Mega FHC that priced in early February. This also had an 18-month maturity and no put.
The deal was priced at par, with a zero coupon and redemption price of 99.065% to yield minus 0.625%. The conversion premium was fixed at 25% to the stock's spot close.
Underlying assumptions showed a bond floor of 95.2%, theoretical value of 98.1% and implied volatility of 30%. This was based on a credit spread of 85bp, dividend pass through, 5% borrow cost and 24% volatility assumption.
Terms for the Mega deal were more aggressive even though the transaction was priced at a time when the CB was less hot. Today the deal is trading at 107% bid with a conversion premium of 28.66% and yield-to-maturity of minus 6.510%.
Earlier in the week, Ritek Corp also priced a $220 million convertible. So too, this had a more aggressive structure than Taishin even though Ritek is a B+ rated credit and Taishin Baa3.
Ritek was priced at 105.16% with a zero coupon and redemption price of 92.73% to yield minus 2.5%. It has a slightly longer structure since it is puttable after two years. The coupon was set at 8% to the stock's spot close.
Like Taishin, Ritek also spiked straight up to 109%. Yet given the deal was priced at 105.16%, this equates to a more acceptable four-point jump.
Company supporters say Taishin wanted a low premium structure because it wants to ensure its deal converts. It also did not feel the need to balance this with a more aggressive yield because it was keen to complete a deal that satisfied investors.
A low premium would have also been dictated by the stock's valuation. Taishin is currently one of the most expensive Taiwanese banks on a price to book basis and was trading at 3.4 times 2004 stated price to book on Friday. By comparison, Chinatrust, which has a similarly retail franchise, was trading around1.9 times.
Books for Taishin's deal closed 20 times oversubscribed even though orders were capped at 10%. More than 200 investors applied for paper and virtually all wanted to hold it on an outright basis.
For Deutsche Bank, such a successful deal must have been extremely satisfying. It certainly broke the norm.
Typically the CB market is swamped with Taiwanese paper, but in this instance Taishin offered welcome diversification from India. And where normally mandates are highly competitive, Deutsche was able to retain sole books for a sizeable deal. Other banks were unable to wrest the mandate from it despite offering more aggressive terms, or even trying to buy the whole deal from Taishin at a significant premium to par post launch.
Taishin has long been a favourite of foreign investors and currently has a foreign shareholding ratio of about 34%. It was one of 12 new banks given licenses by the government in the early 1990's and has been at the forefront of developing modern retail banking in the face of a stagnating state-owned sector.
It is now the second largest credit card issuer in the country behind Chinatrust, which has a much longer history and because of its high margin retail focus runs an exceptionally high Net Interest Margin (NIM) by Taiwanese standards - 4.84% at the end of 2003.
Its asset quality is also exceptionally strong, with NPL's standing at just 2.45% at the end of 2003.
This year management is projecting 33% profit growth to NT$10.051 billion.
