Taiwan Semiconductor Manufacturing Company (TSMC) has taken the capital market by surprise with its inaugural, ultra-low yielding US dollar bond that is already being compared to the debt issued by other seasoned electronics giants. And after receiving robust interest particularly from US investors, TSMC is banking on its brand name and relationship with US companies to avoid paying an ‘Asian premium’.
On Wednesday (March 27), TSMC (‘A’ Fitch, ‘A+’ Standard & Poor’s) hit the market with a US$1.5 billion deal covering three- and five-year tranches. The Reg-S/144A bond is TSMC’s first outside Taiwan though it is an active domestic issuer, selling TWD85.6 billion (US$2.85 billion) worth of debt in 2012 alone, according to Dealogic.
In January Asiamoney PLUS reported exclusively that TSMC was looking to issue a debut dollar bond.
“Obviously we can raise corporate bonds in Taiwan and that’s what we have been doing that over some time – and rates are fantastic,” Elizabeth Sun, director of corporate communications at TSMC, told Asiamoney PLUS on March 26. “We achieve yields of 1.5% for a 10-year deal and 1.38% over a seven-year deal, so we know that if we continue to stay in Taiwan we can enjoy good interest rates. But we’re looking towards US dollars for funding-source diversification and general funding.”
Initial guidance for the three-year tranche is 75 basis points (bp) over Treasuries and 95bp for the five-year, equating to a yield of approximately 1% for the three-year tranche and 1.63% for the five-year. Dealers believe the already-tight guidance may drop even further after the US market opens, given American investors are expected to carry the deal. Goldman Sachs is the sole bookrunner.
“The initial guidance is looking super tight to me - I would have thought the five-year tranche should start in a marketing context of the low 100s rather than 95,” said one syndicate banker away from the deal. “Asian investors will have limited appetite for this sort of yield, but US investors will be more interested because of its name.”
The strong US bid made the tight pricing possible. During the deal’s roadshow, dealers needed to educate investors in Asia, Europe and the US about the credit and the industry in which it operates. Through the process, bankers found that TSMC’s low yield is sufficient for American investors who are keen for TSMC’s credit quality, geography and brand name, given it is a major distributor of semiconductors to American businesses.
Asian investors, however, are more likely to stay away given the higher yields they are accustomed to from other investment grade credits in the region.
“The US accounts they met with became more familiar with the industry and are look at it outside the perspective of Intel,” said one debt banker. “US investors will look at it from a name and rating perspective while Asian investors may buy it as a museum piece but won’t be as attracted by the low yield.
“It’s interesting the way different geographies are approaching a name,” the banker added. “The US has a global outlook on credit, while in Asia there tends to be somewhat of a tunnel-vision going on with a focus on yield, different than what you may expect from an international perspective.”
TSNC comparables are recent deals from Intel (‘A1’ Moody’s, ‘A+’ Fitch, S&P) and Samsung Electronics’ (‘A+’ Fitch, ‘A1’ Moody’s, ‘A’ S&P), which both saw strong demand for their bonds due to their credit quality and dominance in the semiconductor and electronic industries.
Intel’s US$3 billion 2017 bonds are trading at 63bp over Treasuries, while Samsung’s US$1 billion five-year bond sold April 3, 2012, trade at 95bp, on an adjusted curve basis.
“We need to take a step back and realise that this is a 144A issue and a Taiwanese company with a superb credit rating,” explained one senior debt capital market banker (DCM). “US investors are looking at this deal like they look at Intel...Taiwan Semi’s deal pays a premium to where Intel is trading right now, but it’s a debut premium rather than an Asian company needing to pay more. Even a company like Intel is going to pay up on a new issue premium.”
TSMC a unique borrower
While TSMC hopes prices will come in further, bankers outside the deal are sceptical the issuer will do much better – and are even more incredulous other Asian names will be able to follow its lead.
“Investors are comparing this deal to Samsung, which has a market cap of about US$200 billion. TSMC’s market cap is market cap is about US$86 billion – it’s trading at parallel prices as a company that is more than double its size,” said the syndicate banker. “If you go out with those levels, you must be getting decent feedback. But that’s very tight.”
In response, TSMC’s Sun says that the company’s ratings and business scope makes it as a desirable credit.
TSMC’s feat is regardless unique. Another highly rated Taiwanese credit – Competition Team Technologies (‘A-‘ S&P) – was trading at 150bp over Treasuries by the afternoon of March 27, months after issuing its US$650 million five-year deal to yield 2.125%. It shows that not all Asian investment grade credits will receive the same treatment as TSMC.
The difference, bankers say, is that TSMC is a globally recognised brand name with international business connections within a high profile industry. Asian companies will have to share these characteristics to achieve the same pricing success – and these businesses are few and far between.
“There are names in Asia that can achieve this, but they are not prevalent,” said the debt banker. “There’s going to be a scarcity of bonds like Taiwan Semi’s, which may make them even more appealing.”