hynix-convertible-finally-hits-the-market

Hynix convertible finally hits the market

Investors overcome aggressive fixed terms as the bonds are re-offered below par.
Korean memory chip maker Hynix Semiconductor Inc. returned to the capital markets last night with a $471.1 million five-year convertible bond that it had originally planned to sell together with the straight equity issue completed in June.

At that time the companyÆs creditors took priority and while they were able to raise a combined $1.2 billion in a market that was just coming out of a six-week correction, the company had to settle for $300 million worth of primary capital. YesterdayÆs CB makes up the balance of the companyÆs original fund raising target of $700 million.

According to the term sheet, the proceeds will be used for general corporate purposes, which will include funding for an ongoing expansion of the companyÆs 12-inch semiconductor capacity.

Last nightÆs offer was brought to market by Credit Suisse, Deutsche Bank, Merrill Lynch and Woori Investment & Securities, which also acted as joint bookrunners for the equity offering in June.

The CB was a bit unusual in that it was launched to the market at fixed terms, but with a re-offer price ranging from 99% to 99.5%. The reason, according to people familiar with the deal, was that the issuer had a very specific pricing objective in mind, which some say was prompted by a bid for the mandate from a rival bank, and which was too aggressive for an offer at par. This also meant there was virtually no room for a range on either the yield or the conversion price.

ôIt would be odd to market a CB with yield and conversion price ranges as well as with a re-offer price range so once the bookrunners decided to go down the path of a re-offer price it would have made sense to fix the other terms,ö one observer says.

Despite the tight pricing, however, investors were still quite keen on the deal and the re-offer price ended up being fixed at 99.5% for an effective yield to put of 3.6287%. If the bonds had been priced at par, the yield would have been a slightly lower 3.375%.

According to sources, the bookrunners did not lose money on the deal although it was a bit unclear last night whether they had actually made any.

What is clear is that Hynix is an important franchise client for the four banks - aside from the June placement they also arranged the first creditor sell-down in October 2005 û which likely made them less concerned about giving up part of their fees. Especially since the company operates in a capital intensive industry and is likely to revisit the market at frequent intervals.

Deutsche Bank and Merrill Lynch were also joint bookrunners on the companyÆs $500 million high-yield bond in June last year, together with Citigroup and UBS.

The deal was said to have been about five times covered with participation from 70-80 investors. Demand came primarily from the broad-based CB investor community.

The zero-coupon bonds can be put back to the issuer after two years at 106.92%, and there is also an issuer call after two years, subject to a 130% hurdle. The shares are convertible into either common shares or Global Depositary Shares and if converted in full, the new shares will account for about 2% of the enlarged share capital.

The conversion premium was fixed at 30% over yesterdayÆs closing price of W36,200 for a conversion price of W47,060. The share price had been trending upwards since the June placement, which was done at a 2.2% discount to the then market price of W27,100, but took a southbound turn after closing at a post-restructuring record of W40,100 on September 18.

The 9.7% decline since then would have made it slightly easier to get away with a 30% conversion premium.

The underlying assumptions include a credit spread of 275 basis points over the US swaps rate û a level at which the bookrunners provided assets swaps to cover 17.5% of the deal. Another 12.5% of the offer was covered by credit default swaps at 250 basis points over.

The stock borrow coast was assumed at 300 basis points and investors get full compensation in case the company decides to pay a dividend.

This gave a bond floor of 91.6%, which is quite low for a two-year CB but since there is plenty of stock lending available many investors regarded the deal as an attractive volatility play. At the final price, the implied volatility was about 31%, which compares with a 100-day historic volatility of just under 35%.

The demand was underpinned by a positive earnings outlook for Hynix, primarily because of the greater cost efficiency it was forced to adopt during its four years of restructuring.

ôWhile we still doubt the sustainability of firm DRAM prices, we believe HynixÆ improving cost structure should limit the downside risk to earnings,ö Macquarie said in a recent research report, which projected 36% earnings growth in the third quarter and 18% in the fourth quarter.

Analysts Do Hoon Lee and Kenneth Lee noted that process migration and a ramp-up at the companyÆs China fab are coming through faster than expected, which is leading to high production yields and providing DRAM margin leverage. At the same time, Hynix has been expanding its NAND flash chip capacity which will result in NAND sales growth despite weak NAND pricing, they said.

Hynix was the first Asian equity-linked deal to price in three weeks and only the third one since August 7, although it was followed a couple of hours later by an $85 million CB for Taiwan-based but Nasdaq-listed ChipMOS Technology.

While it was likely a coincidence that both these deals came to market on the same day, the fact that they did may be a signal that issuers are becoming more comfortable with the underlying market again. And perhaps these deals will finally give the market the kick start it needs after the summer lull - something which Singapore-listed China Sun Bio-chem Technology GroupÆs $100 million offering in early September was unable to do.

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