TPK's $400 million CB sees overwhelming demand

TPK Holding, the newly listed Taiwanese company that is the main supplier of touch screens to Apple’s iPhones and iPads, last night sold $400 million worth of three-year convertible bonds to raise funds for expansion. The deal was widely anticipated since Taiwanese companies have to make a public filing before issuing new securities, and investors piled in to get a share of the company’s success story.

According to sources, the offering attracted more than 170 investors and was 10 times covered even though the order books were kept open for just two-and-a-half hours and the deal didn’t come cheap. The CB also quickly traded up to about 103 in the grey market.

As with most Taiwanese CBs these days, the deal was accompanied by some asset swaps, which gave investors confidence in the credit. However, it was the equity story that sold this deal.

Since raising $200 million in an initial public offering in October last year, TPK has seen its share price multiply 3.7 times and yesterday’s close of NT$812 was only 3% below the all-time high of NT$837 that the stock hit in early February. Clearly investors are expecting this performance to continue and they do have the support of analysts who have 19 “buys”, two “holds” and no “sells” on the stock.

The three-year deal (no put, no call) came with a zero coupon and zero yield that were fixed at launch, and a conversion premium ranging from 25% to 32% over yesterday’s closing price. Given the overwhelming demand, it was no issue for joint bookrunners J.P. Morgan and Nomura to push the premium to the top of the range – indeed, in this case it was the allocation that posed the real challenge. The 32% premium is the highest for a zero coupon and zero yield deal since 2004, according to a banker, and gives an initial conversion price of NT$1,071.84 – approximately 17% above the analysts’ average target price of NT$919.

The deal is also looking aggressive from a valuation point of view, with a 35% implied volatility and a bond floor of 90.6%. TPK has a 100-day historic vol in the low 40s, although so far the volatility has been pretty much one-directional. Indeed, having listed less than six months ago, the stock doesn’t really have much of a volatility history to base a valuation on, which makes it even more impressive that it was able to price at a higher implied vol than any other Taiwan convertible in more than four years.

The valuations assume a 5% stock borrow cost, since there is no borrow in the name, and a full dividend yield pass-through. The bookrunners marketed the deal with a credit spread of 170bp over Libor, which they backed up with asset swaps covering 25% of the deal. There were also some additional asset swaps available in the market from local banks.

However, with about 75% of the demand coming from outright investors who were keen on the fundamental story, and the allocation favouring outright investors over hedge funds, the need for asset swaps wasn’t that great. Still, the simple fact that it was available helped make investors comfortable with the credit.

Sources said the order books contained a lot of high-quality orders, and with quite a few investors ending up with no bonds at all after the lengthy allocation process, the CB looks likely to remain well supported in the secondary market.

TPK, whose main production site is located in Xiamen in China, has grown rapidly since it was established in 2003 thanks to its partnership with Apple. The inventor of the so-called projected-capacitive (P-Cap) touch technology, the company has worked together with Apple to develop the touch screens for its iPhones and iPads, and while competitors have started to emerge (Apple does need more suppliers to support the consumer demand for its products), TPK’s position as the main supplier of this technology is not really in question.

Last year, TPK posted 219% growth in revenues and doubled its net profit to NT$4.7 billion ($162 million). And the company remains in a heavy expansion mode. By June this year, it will have doubled its monthly capacity of glass lamination to 20 million units, from just 10 million units at the end of 2010. It is also seeking to increase its PET-film lamination capacity to 3 million units from 1.2 million and its cover glass capacity to 7.5 million units from 2 million units.

The proceeds from the CB will go towards the expansion of its plants and the acquisition of machinery and other equipment.