In a rare but welcome diversification from the Taiwanese tech and banking sectors, Morgan Stanley priced a $143.75 million convertible for shipping company Wan Hai Lines yesterday (Monday).
The deal was launched under an accelerated timetable, with the transaction closing three-and-a-half-times oversubscribed after a marketing period, which spanned Asia's close to London's lunch. Individual orders were capped at $10 million to cope with the expected demand and the greenshoe was exercised shortly after launch bringing the deal size up from $125 million to $143.75 million.
Terms came at the aggressive end of the indicative range and comprised a zero coupon, zero yield, par redemption structure with a five-year maturity and 23% conversion premium to an NT$29.5 close (18% to 23% pre-marketed). There is also a call option after year three subject to a 130% hurdle and two put options – one after 18 months and one after three years.
Underlying assumptions comprise a bond floor of 95%, fair value of 107% and implied volatility of roughly 23.4%. This is based on a credit spread of 200bp over Libor, a 1.4% dividend yield and zero stock borrow. Historic (100 day) volatility stands at 56%, with a 40% volatility assumption priced into the model.
Bankers report the participation of a total of just under 60 accounts in the Reg S deal, with a rough geographic split of 25% Asia, 50% Europe and 25% offshore US. Getting the deal rated was said to have been a big plus point and given the company's lack of leverage, empty credit lines led to asset swap demand for the entire deal size.
In its ratings release, Standard & Poor's assigned the company a BBB- rating and the deal a BB+ rating. The one notch differential, which puts the convertible in non-investment grade territory, was attributed to the amount of secured debt held by the company, which is nevertheless forecast to obtain an extremely high leased adjusted EBITDA interest coverage ratio of 11 times 2002 earnings.
Outside observers comment that two of the more noticeable aspects of the transaction are the defensive bond floor, balanced by an aggressive conversion premium. Although the stock has no borrow, a bond floor of 95% is still considered relatively cheap considering investors have previously been willing to pay up to seven points in better market conditions. However, given that virtually no Asian convertible made investors money during 2002, such reticence is hardly surprising. But with old economy stocks back in favour among Taiwanese investors, Wan Hai's pricing stands in a different league to the smaller tech deals, which came to the market towards the end of 2002 and could only be sold on the back of multiple re-sets.
The defensive bond floor is also partially offset by a high conversion premium for a stock, which has run up just under 80% over the past three months. Consequently a number of analysts, who had previously been favourable towards Wan Hai, now believe it is fully valued. This is based on the fact that the stock prices of shipping stocks traditionally race up ahead of annual negotiations for transpacific freight rates, which run through to the end of the first quarter.
Wan Hai is the largest container shipping company in the intra-Asia market. At the end of 2002, the company operated a fleet of 55 container vessels with an aggregrate capacity of 69,271 20-foot equivalent units in 24 trade lanes. Revenue from intra-Asia trade accounted for about 76% of net operating revenue during 2002, with moves to open direct transport links to China providing a strong underpinning for the company's share price.
