The quick succession of deals from Taiwan has resulted in a much lower subscription level of two-and-a-half to three times for Yageo's $220 million offering, compared to the 10 to 12 times levels recorded last week by Quanta and Acer. Highlighting that there are limits to investor appetite despite the region's fundamental supply/demand imbalance, the deal has, nevertheless, been considered a success after achieving similar pricing levels to its immediate predecessors.
Prior to pricing yesterday (Thursday), there had been some confusion about terms, however, after the deal's re-filing documentation was mistakenly sent out as a final term sheet by one syndicate bank. In the filing, the company had deliberately opted to keep its options wide open and as a result, some observers believed that it had wanted to do a five-year deal, rather than the two-year which subsequently emerged.
But its decision to follow the example of Acer Communications & Multimedia (ACM) and use a zero coupon structure with two-year puts has been applauded by sector analysts. "It shows that Taiwanese companies are taking a more sensible approach to corporate finance compared to last year when they opened themselves up to re-financing risk with their beloved rolling put structures," one says. "This deal is re-financing a bridging loan for the company's acquisition of three factories from Philips and it makes much more sense to term it out."
With Salomon Smith Barney as lead manager, the five-year deal was priced at par with a conversion premium of 21.4% to spot and a two-year put at 110% to yield 17bp over Treasuries. Redemption is at par. Joint-lead is FB Gemini, with ABN Amro and CLSA as co-leads.
Compared to ACM, universally considered a stronger credit, Yageo achieved a marginally lower premium to the former's 25% level, and incorporated a more generous put to the former's 108% level. With a similar bond floor of 92.5, the deal also has a much wider underlying credit assumption of 350bp over Libor compared to ACM's 250bp level. With an implied volatility of 24.6% and historic (100-day) volatility of 60%, theoretical value is said to stand at 104.
By geography, Europe was said to account for about 80% of demand, with Asia contributing a further 10% to 15%, and offshore US funds about 5% to 8%. By investor type, bankers say that outright buyers predominated over hedge funds. "Yageo's GDR is not that liquid and there isn't a price up there every day," one banker comments. "This deal has much more appeal to investors who believe in the company's long term story."
Like Quanta and ACM before it, the structure was also said to appeal to the vast swathe of investors that remain uncertain about the future direction of the Taiwan market. "Our Taiwan tech team has just undergone an extensive roadshow to investors in Europe and the US," the banker continues. "Feedback from pure equity investors suggests that many aren't sure what their re-entry point should be. They want to get back in, but they can't pinpoint when the tech cycle might turn. It could be towards the end of the second half, but many analysts, including our own, believe that the upturn might not occur until well into the third quarter."
The fact that the Taiwan Weighted Index, up 21.52% so far this year, appears to have temporarily de-linked itself from the Nasdaq, down 8.72%, also worries investors. "They don't know whether the local rally is sustainable, or whether it could yet be de-railed by events in the US," the banker concludes. "As a defensive hedge, a convertible, therefore, makes a great bet."
But with four convertibles now out in the market, specialists believe that a short breathing space is needed before any new deal could be guaranteed success. "Unless the Nasdaq stabilizes, it will be quite hard over the next few weeks," one banker argues. "Investors now have more choice. Because of the global nature of the market these days, most are also looking at European comparables rather than just Asia on its own. They've had Orange and a couple of other jumbo deals that weren't particularly successful and the tone of the market is turning to one of caution."
Where Yageo is concerned, the stock has run up 64.12% so far this year, following a company announcement that it expects the Philips acquisition to push earnings up by more than 50%.
"We have a hold recommendation on the stock at the moment," says Jasmine Lu of UBS Warburg in Taipei. "We think that at its current NT$43 ($1.33) trading price and P/E ratio of 11 times 2001 earnings, it's fully valued. We have a conservative view of the industry, which we don't think will pick up until the third quarter and there are integration issues as a result of the acquisition."
