Hynix secures strategic investor

Texas Instruments has taken a $100 million stake in an enlarged GDR and high yield bond offering.
The participation of the US semiconductor company provides one of the first concrete signs that Hynix Semiconductor's re-capitalization is moving towards a successful conclusion. It has helped push the global depository receipt (GDR) size up from $800 million to $900 million.

In advance of pricing this Friday, observers report that books for the equity deal are already oversubscribed, with tier one accounts now starting to bulk out demand that was earlier dominated by hedge funds. For Hynix and its lead manager Salomon Smith Barney, this positive momentum marks a very welcome turnaround from the widespread scepticism which first greeted news of a potential deal in early May.

When Hynix set out on roadshows for the twin GDR and $350 million bond, it faced headlines dominated by plummeting DRAM prices, bloated debt levels and the legitimacy of dropping a Korean government-enforced restructuring on global investors. It appears to be ending them with a firmer belief in the new management's ability to move the company forwards and some optimism that the sector may be about to rebound.

Last Thursday's announcement by Intel that second quarter sales remain ahead of analysts' forecasts has given new hope that microprocessor shipments will start to increase from July and underpinned share prices across the whole sector. Hynix has also seen its share price increase significantly since its April 17 year-to-date low of W2,420, trading up to W4,060 just prior to roadshows in mid-May and closing Monday at W4,545. In the past 12 months, it has hit a high of W25,200.

However, with many syndicate banks reporting price sensitivity around the W3,500 to W4,000 level, the stock's trading pattern over the coming few days will be crucial to the final discount attached to the deal. The standard practice of shorting a deal down a few days before pricing may be compounded in this instance by the fact that a large number of options expire on Thursday.

Observers also report that much of the rally to date has been driven by domestic investors, convinced that a successful re-capitalization will bring foreign investors back into the stock.

Texas Instrument's decision would further seem to indicate that it too believes in further upside potential for a company that is still trading at a deep discount to all its global comparables. The stake is being structured as a debt for equity swap, such that Texas will receive $100 million in equity in return for $100 million in debt owed by the company. It will also be subject to a 60-day lockup.

Under the terms of a patent license agreement between the two companies expiring in December 2007, Hynix owes Texas Instrument $129 million in royalty obligations. Having previously asked the company if it could re-negotiate the repayment schedule, it has now secured an only slightly less palatable option of virtually wiping the debt clean.

Books for the domestic offering, representing 10% of the GDR, open today (Tuesday) in Korea. Following the government's recent approval of two-way convertibility between the domestic and international markets, this will mark the first instance of a simultaneous sale of depositary receipts to domestic and international investors.

All existing shareholders (except Hyundai) have the right to participate in the offering to avoid being diluted, but will have no pre-emptive rights. The rule 144a deal encompasses one GDR per five common shares and numbers Deutsche, SG Securities, ING Barings, Nomura and LG Securities among the final syndicate.

Currently Hynix has about 500 million shares outstanding and a market capitalization of about W2 trillion. With the issuance of W1 trillion in convertible bonds to its creditor banks and $800 million from the GDR issue, the company will have achieved a 100% re-capitalization. It will have also reduced its debt to equity ratios from 206% as of end 2000 to about 130%.

To give itself optimal flexibility, Salomon has made sure that it will not be operating under any constraints in terms of either the maximum discount that can be applied or pricing below fair value.

To many observers, the mere completion of the deal will rank as a singular achievement given the backdrop Hynix faced when it embarked on the task in late May. And indeed, over the past week, the market has already shifted from querying the lead's sanity to watching how the transaction will perform when it breaks syndicate.

As one banker put it,  "My rationale for success will be seeing Salomon price the deal within the parameters it set itself. A number of people have queried how heavily represented the hedge funds are going to be. But it doesn't really matter whether they take up 70% of the book, as long as the deal comes at a reasonable discount and trades up in the aftermarket."


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