Chartered Semiconductor tumbles on rights issue plan

Shares in Chartered Semiconductor Manufacturing tumbled 39% yesterday after the Singapore-listed chip maker confirmed on Monday that it will seek S$464 million ($300 million) in fresh capital through a rights issue. The sell-off was likely sparked by the deep discount to the market price, which will severely reduce the earnings and book value per share for shareholders who do not wish to increase their exposure to a loss-making company in an industry where the near-term recovery prospects are questionable.

And with the share price down so significantly, the offer has now become a lot less attractive for investors who would have been willing to subscribe, throwing doubt over the participation of minority shareholders in general. Based on yesterday's closing price of S$0.13, the discount has already narrowed to 46%.

However, Chartered will get its money since Temasek Holdings, which owns 59.4% of the company through its wholly-owned subsidiary ST Semiconductors, has committed to take up its entitlement in full and to also buy additional shares up to 90% of the deal, should it be needed. The remaining 10% will be underwritten by Citi, Deutsche Bank and Morgan Stanley which are also joint lead managers for the offering.

Chartered said investors would be able to buy Singapore-listed shares at S$0.07 per share on the basis of 27 new shares for every 10 existing ones, which represents a 69.5% discount to the last traded price on Monday (S$0.205) before the stock was suspended. Investors who hold the company's American depositary shares will be offered new ADSs at an indicative price of $0.45 apiece, or a 71% discount to the last ADS closing price of $1.55 on March 6.

The discount is significantly wider than for the other Singapore rights offerings this year, which have typically been launched 30%-40% cheaper than the prevailing market price. However, this is largely due to the fact that Chartered will issue more new shares than the number of shares that are currently outstanding, while on the other deals the shareholder will get less than one new share for every existing share they hold. Compared with the theoretical ex-rights price, which based on Monday's final price comes out at 10.6 Singapore cents, the discount at the time of the announcement was a more modest 34%. This is in line with the offerings from Singapore's DBS and CapitaLand, and also from Malaysia's Maybank, which set the price for its upcoming rights offering over the weekend.

The sharp sell-off may also have been due to the fact that investors are tiring of rights issues. So far this year there have already been seven rights offerings of size announced in Asia that will raise a combined $9.2 billion. Add to that HSBC's upcoming $17.7 billion deal and you get a significant amount of paper that needs to be absorbed by the market at a time when risk aversion remains high and many investors are still sitting on significant losses on investments they made last year.

Chartered also operates in an industry that is highly cyclical and which until now has had quite a poor outlook and it is significantly smaller in scale than its key Taiwanese competitors, which may make some investors cautious about putting more money into the company at this stage. Its share price fell 81% last year. In connection with announcing the rights issue Chartered said, however, that its business seems to be stabilising compared with its estimates at the end of January with additional wafer orders for second quarter shipments helping to reduce the cost per wafer. As a result, the company now expects its first quarter net loss to be $127 million (plus or minus $5 million), which is $20 million less than its January guidance of $147 million. The company posted a loss of $114 million for the fourth quarter last year.

According to the company's senior vice president and CFO, George Thomas, the macroeconomic environment continues to be challenging though, and the business visibility remains limited.

Chartered said in the announcement that the rights offering will strengthen its capital position, and provide it with additional liquidity to manage its maturing indebtedness, fund planned and future capital expenditures, and fund general corporate purposes. The rights offering will also improve its debt-to-equity leverage ratios and the strengthened capital position should help "preserve the confidence and commitment of its customer base", the company said.

As of the end of December, Chartered had total debt obligations of $2.1 billion, comprising $1.8 billion of straight debt and $265.9 million in the form of convertible redeemable preference shares, which it currently believes are unlikely to be converted into ordinary shares. At the same time it had a cash balance of $594.1 million and unutilised credit facilities of about $1 billion, of which $750 are available only for equipment purchases for its Fab 7 plant.

The company said it believes that its cash on hand, existing working capital, planned use of existing credit facilities, credit terms with its vendors, and projected cash flows from operations will be sufficient to meet its capital and research and development expenditures, debt service obligations, investment and current liquidity needs for at least the next 12. Still, it has decided to "take pro-active steps to manage its capital resources."

"The crisis in the financial markets and deteriorating economic conditions globally have adversely impacted many industries including the semiconductor and foundry industries. The depth and duration of the downturn and the availability of credit on reasonable terms are uncertain. Hence, Chartered believes that a pro-active and prudent approach to managing its capital resources is critical to its business," the company said in the announcement.

As a result of the rights issue, the company's debt-to-equity ratio, based on the end-December numbers, will fall to 1.21 times from 1.46 times and its adjusted net debt to equity ratio will fall to 0.70 times from 1.05 times.

Chartered's rights offering will be open to investors who hold the company's Singapore-listed stock as of 5pm local time on March 18 or to those who hold its ADSs by 5pm New York time on the same day. The offering is expected to be completed by mid-April.