The Deutsche Bank-led deal is a bit unusual for a pre-IPO CB, however, in that it was preceded by a three-day roadshow and at least partially sold into the public market. Most of these transactions are usually placed privately with a small number of investors. The shares have also been trading over the counter in Taiwan since early December, albeit in very modest volumes, and the CB can be converted immediately after the settlement.
Few investors are expected to do so, however, but will hold on to the bonds until there is an initial public offering or alternatively until they can be put back to the issuer at the third anniversary. The bonds are structured to encourage the company to go public within three years.
Like with all pre-IPO investments, Taiwan High Speed is not without risks. For one, the company has never made a profit, which means it doesnÆt qualify for listing on TaipeiÆs main board, or most international exchanges, at this point. Deutsche Bank also didnÆt provide any credit bid. However, the bonds have been rated single-B by Taiwan Ratings û two notches below investment grade - which allowed investors to use other Taiwan debt issues with the same rating as benchmarks for the credit.
Even so, sources say demand was quite strong with the base issue size of $250 million more than two times covered, which led to the decision to exercise the $50 million upsize option in full at the time of pricing. In this respect, it likely helped that Taiwan High Speed is about 19% owned by the executive yuan or other government-related entities. It also operates the 345-kilometre railway link under a 35-year build operate transfer (BOT) contract with the government that took effect in 1998, which includes development rights for some of the land adjacent to the tracks and stations.
Deutsche Bank, which has been working on the transaction since December, had also assured itself as much as possible of a successful outcome by signing up three cornerstone investors, including one Deutsche Bank entity, before it launched the public portion of the deal. The three investors bought 45% of the upsized $300 million offer with a six-month lock-up, leaving only $165 million to be sold to other investors.
The other two cornerstones are hedge funds GLG Partners and Och-Ziff.
The public portion of the deal was said to have attracted 25-30 investors, from Europe and Asia. Aside from hedge funds, the order book also included some straight equity investors who are seeing growth potential in the project.
ôEssentially, you have to take a bet that the free-float and the liquidity created post the IPO will be sufficient to allow you to exit at a profit,ö one observer says.
The management estimates that Taiwan High Speed will break even by the end of 2008, supported by an expected doubling in daily passenger numbers between the end of this year and 2009.
The bonds, which have an effective three-year maturity, were marketed with a conversion premium between 5% and 10% over the 15-day volume weighted average price of NT$9.0881 and a coupon between zero and 1%. The initial yield range was 5.5% to 6.5%, although there is a step up function that will see it increase by one percentage point if there has been no IPO (or qualified public offer, as it is referred to in the prospectus) within three years û or five years if the bonds arenÆt put back to the issuer after three years.
The solid demand allowed the company to get away with no coupon and to fix the conversion premium at the top of the range at 10% for a conversion price of NT$10. The latter can be considered quite modest, especially since the share price was trading above NT$10 until early February. It has hovered at about $9, which only minor fluctuations, since mid-March. However, a zero coupon is unusual on pre-IPO deals as investors typically want to be able to cover their cost of carry.
Investors were compensated by getting the maximum 6.5% yield, though. With the step-up function, this means investors will get a 6.5% yield if there has been a QPO within the first three years but they still decide to sell the bonds back on the put date. If there has been no QPO, they will get a 7.5% yield.
If they hold on to the bonds to maturity and there is a QPO between years three and five, the yield is once again 6.5% when the bonds are redeemed. If company has still not gone public by that time, however, the yield will be 7.5%. The issuer can call the bonds starting from 12 months after a QPO subject to a 125% hurdle to encourage investors to convert once the company has gone public.
The QPO refers to an IPO of at least $300 million, or a smaller IPO followed by up to three follow-on offerings, on either TaiwanÆs main board, the secondary GreTai Securities Market or any other recognised exchange in Asia, Europe or the US.
Based the companyÆs current equity value of about $4 billion, an IPO of that size would account for about 7% of the enlarged share capital.
Assuming a credit spread in the range of 600-700 basis points over US Libor, which is in line with other Taiwan single-B credits and a full dividend protection, the bond floor comes out at about 89.5%.
The $15 billion railway project, which started operations on January 5 after nine years of planning, delays and fund raising problems, has shortened the travelling time between Taipei and Kaohsiung to 90 minutes from four hours previously. The railway runs along the west coast of Taiwan where approximately 94% of the countryÆs 23 million people live and has already started to eat into air travelling. This has forced the main domestic airlines to cut prices in an attempt to maintain their business.
By March 8, about 2.09 million passengers had travelled on the 300-kilometre-per-hour trains and based on first quarter operational data, the company estimates the passenger traffic will amount to 100,700 people per day in 2007. According to the CB offering document, the target is to increase the flow of travellers to 219,000 per day by 2009 and to 270,000 by 2015.
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