TPK ends CB drought, but investors still selective

It has been a sorry state of affairs for Asia ex-Japan's ECM market in 2015. In the first quarter, a total of 125 IPOs were priced in the region — up by 14% year on year. But dollar volumes show an opposite trend, shrinking by 9%.

It’s a similar, but far more dismal story, in equity-linked. There have been 27 deals in 2015 — three more than last year. But volumes have tumbled 80% to $514.4m (excluding TPK’s deal), with none of the deals breaking the $150m mark.

That gloomy backdrop mean that when Taiwanese touch panel supplier TPK launched a zero coupon CB with a five year tenor on the evening of March 31, there was a sigh of relief. The deal, callable and puttable after three years, started at a base offering size of $150m, with the possibility of increasing it by $50m on the same day and by another $50m up to 30 days after the trade wrapped up.

The CB came with a yield of 1.5%-2.0% and a conversion premium of 15%-20% over where the company’s global depositary shares (GDSs) were to be placed via a simultaneous offering. The simultaneous placement, meanwhile, consisted of 20m GDSs that were pitched at a range of $6.68-$6.82.

TPK’s move to use a combination of CB and straight equity offering stemmed from its desire to reposition its capital structure, said a source close to the situation.

“The company wanted to push its short term debt and make it long term,” he said. “It also has an old CB puttable in October, so with the new issuance it’s able to stretch out maturity periods. And the separate new equity is just useful for its daily business and capital expenditure.”

Using a concurrent GDS offering also helped gain traction for the CB, added the source. This is down to the fact that some of the risk that comes with a CB is reduced as the trade is priced off the GDS — giving investors some comfort when they see demand coming in for the equity portion of the transaction.

That was certainly the case for TPK, whose deal was led by joint bookrunners Barclays, HSBC and JP Morgan. Investors poured into the CB, allowing the company to use the increase option and the greenshoe straightaway to raise a total of $250m. Pricing came out at a 15% conversion premium and a 1.5% yield, the best end of both ranges for the issuer.

“It was a blowout response from investors,” said a second source close to the situation. “And it was absolutely imperative that the deal did well because there hadn’t been one in the past four months. There was a lot riding on this.”

TPK didn’t disappoint. Its CB traded up to 101.78 in the immediate aftermarket, and on the afternoon of April 1 it ranged between 101.0-101.5.

The solid response from investors and the positive aftermarket performance bodes well for future issuance, said a banker who was not working on the TPK deal.

“It was structured in a nice and clear format, they got both the upsize options very quickly and the bonds traded up,” he said. “It’s really the best indication of a trade that’s gone very well and has made everyone happy.

"It’s not a big enough deal to fill the dearth of issuance, but it’s enough to spur issuers to have a good look at opportunities in the market.”

One big reason for the scarcity of issuance this year has been the resurgent straight debt market, which is a more accessible option for many issuers. And straight debt is non-dilutive.

Non-investment grade names that might not be able to support the cost of issuing a straight bond typically prefer the equity-linked market. But such names have also been drifting away from equity-linked recently, said sources, as many companies have worked hard to get credit ratings in the past year to make them more appealing to bond investors.

That’s not to say there has been a complete lack of interest. A Thai firm is understood to have sounded out the market last week for a potential CB, while a couple of Chinese names and one other southeast company are also in the early stage of discussions with banks about raising funds through a CB.

While TPK had the first mover advantage with its CB, the feedback it obtained from the market will not go unnoticed by other issuers.

“It’s definitely opened an issuance window for others, but of course it’s too soon to say about timing,” said the second source close to the situation. “It’s always comforting when a deal prices and trades well afterwards and support for TPK was clearly overwhelming.”

Sources add however that TPK’s success doesn’t necessarily mean every Chinese or US-listed Asian company will head down the CB route, as a Taiwanese reference is less important to them than a well-received deal from a Chinese issuer.

“The bulk of the CB market here is Hong Kong/China. So from that standpoint, a 15% conversion premium is very low and I imagine if a Hong Kong company came out with terms like this, it would have a negative impact on the market,” added the banker away from the deal. “But just the fact that we’ve had one deal after so long is definitely going to spur all the ones that have been discussing a deal to actually issue.”

The lack of issuance makes it appear that investors would be willing to lap up everything that comes. But the banker said that one reason the undisclosed Thai issuer, which spoke to investors last week, did not end up issuing was because it was looking for too aggressive terms.

He reckoned this showed that investors were being prudent about the paper they buy, in spite of the scarcity of supply, and were willing to turn down deals that didn't match their requirements.

“Not every transaction is possible,” he said. “So while there is a demand-supply imbalance, it doesn’t mean investors will buy into deals unfavourable to them.”

Books for TPK’s CB and block opened around 3:30pm Hong Kong time on March 31, with the CB covered far quicker than the GDS placement.

The $136.4m placement was priced at the bottom end of the $6.68-$6.82 range, translating to a 4.5% discount to the stock’s last close. Books were comfortably covered, however, with demand from a mixture of global long-only and hedge funds.

TPK’s $250m CB priced with implied volatility of 22.4%, referenced against 100-day historic of 46%. The credit spread assumption was 300bp-350bp. The bond floor came out at 91.5.

There were some 100 bids in the book, despite the transaction offering no asset swap. This, said sources close to the situation, showed that investors were taking an outright view on the terms and were happy to pitch in without the help of any asset swap. Bonds can be redeemed at 107.76%.

Besides the three joint bookrunners, Yuanta Securities was also involved in the deal in a junior role.