MagnaChip launches roadshows for high yield bond

Korean semiconductor company hopes to raise $750 million from multi-tranche bond

MagnaChip Semiconductor, the non-memory arm recently sold by Hynix Semiconductor, has launched roadshows for a debut bond issue via lead managers Citigroup, JPMorgan and UBS. The deal has been structured to optimize the balance sheet of the company following its sale to a consortium of international private equity investors in October.

The deal comprises a $500 million senior secured issue, which has a 2011 maturity and both fixed and floating rate tranches, plus a $200 million senior subordinated tranche due 2014.

Ratings are about to be assigned and the company is expected to get a non-investment grade double-B rating below fellow foundry operators UMC and Chartered Semiconductor, but above its former parent Hynix. Taiwan's UMC is currently rated BBB, while Singapore's Chartered Semi is rated BBB- and Hynix B- from Standard & Poor's.

However, very little of the deal is likely to be sold into Asia where there has never really been much high yield issuance from the tech sector and the Hynix group has a somewhat tarnished reputation.

After a number of failed re-capitalizations and restructurings following the financial crisis, the group was finally taken over by its creditors and in 2002 announced a $5 billion restructuring plan via its then advisor Deutsche Bank. This involved selling off key assets and re-focusing the group's business back towards its core memory operations.

Earlier this year, a consortium led by Citigroup Venture Capital made a successful bid for the group's non-memory operations, which comprise five wafer fabs focusing on foundry products (contract chips for third parties) and IC solution products including LCD drivers, micro control units and CMOS image sensors. The latter products are typically utilized in digital cameras and flat screen panels for computers and TVs.

The consortium paid $830 million for MagnaChip in a deal that valued the group at 6.9 times 2003 EBITDA and 3.7 times forward EBITDA. Payment came in the form of: $286 million from a credit rollover (KEB provided a syndicated loan); $44 million from new loans; $418 million in preferred and common equity; $44 million in assumed liabilities and $38 million in equity warrants.

Consortium members Citigroup Venture Capital (CVC) Equity Partners, Francisco Partners and CVC Asia Pacific respectively own 36%, 36% and 19% of the series B shares and 35%, 35% and 19% of the common shares. The remaining 9% of the series B shares and 11% of the common shares are predominantly owned by management.

Prior to the sale of MagnaChip, Hynix said that it saw 40% upside from the group, which is being pushed to the forefront of a highly competitive and capex intensive foundry market dominated by Taiwan's TSMC and UMC. Both of the latter companies are lowly geared and highly free cash flow positive .

The two currently command global market shares of 46% and 23%, with IC Insights forecasting that TSMC will return revenues of $7.67 billion in 2004 and UMC $3.86 billion. At the beginning of October, MagnaChip management said they believed they could achieve revenues of $1 billion in 2004, which would push the group into fierce competition with Chartered Semiconductor and China's SMIC.

Chartered, for example, is forecast to post revenues of $1.1 billion in 2004 giving it a 7% global market share, while SMIC is forecast to achieve $1 billion giving it a 6% market share. Chartered currently has seven fabs with monthly capacity of 170,000 wafers compared to 110,000 monthly capacity at MagnaChip, which has five eight inch plants.

Timing of the deal is not ideal given the sector has just entered a downturn, prompting the foundries to slash their capacity utilization ratios from 100% to as low as 80% over the course of the fourth quarter. Most industry specialists believe there will be little clarity on the next upturn until the second quarter of 2005.

However, share prices have conversely shown signs of reviving and MagnaChip has said that it is planning to list on the Korean and New York stock exchanges during 2005.

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