Polysilicon producer OCI prices GDR at 2.7% discount

The Korean company raises $700 million from the largest Asian GDR since 2007.
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Polysilicon should grow as demand for photovoltaic (PV) solar power installations are projected to more than double to 41.9GW by 2015. (AFP)</div>
<div style="text-align: left;"> Polysilicon should grow as demand for photovoltaic (PV) solar power installations are projected to more than double to 41.9GW by 2015. (AFP)</div>

OCI Company, a Korean specialty chemicals producer, accelerated the pricing of its $700 million global depositary receipts (GDR) offering last week on the back of strong demand and a drop in the price of polysilicon, one of its key products.

Initially set to close tomorrow, OCI and its bankers managed to price the deal on Friday last week. It is the largest GDR issue by an Asia ex-Japan issuer since Taiwan’s Innolux Display Corp raised $1.35 billion in November 2007 and the largest ever solar-related equity deal in Asia-Pacific.

The price was fixed at $47.0176 per GDR, which translates into W510,000 for each of OCI’s Korea-listed common shares and a 2.7% discount to Friday’s closing price of W524,000. As per Korean regulations, however, the GDR had to be priced off a reference price that equalled the volume-weighted average price for a three-day period ending two days before the pricing. And the discount to that reference price could not be more than 10%.

Even so, most investors looked at the discount versus the latest market price and, when the share price started to fall on Thursday (after gaining sharply on Wednesday), there was a risk that the maximum 10% discount to the reference price wouldn’t allow for a discount to the latest market price as well. By bringing the pricing forward to Friday, OCI was able to reference the average price on Monday through Wednesday, thus incorporating the 8.3% gain last Wednesday, but not the 8.5% drop on Thursday.

This put the reference price at W553,000 and meant that the GDRs were formally priced at a 7.8% discount to that reference price.

OCI makes a number of different value-added specialty chemical products, including petro and coal chemicals, inorganic chemicals and high-performance specialty gases that are used primarily in the TFT-LCD and semiconductor industries. However, the story it was primarily marketing to investors was its rapid rise to one of the world’s top three producers of polysilicon, which is a key raw material for the production of solar cells. In 2010, 58.4% of the company’s Ebitda came from polysilicon, compared to just 36.6% in 2008.

A report published by industry consultant Solarbuzz this year said demand for high-purity polysilicon should grow alongside a projected increase in the demand for photovoltaic (PV) installations to 41.9GW in 2015 from 18.2GW in 2010.

But the short-term outlook is more complicated. Shares in OCI and competitors such as Hong Kong-listed GCL-Poly fell on Thursday because of a continued drop in polysilicon prices. According to industry website PVinsights.com, the spot price fell 9.4% in the week to Wednesday to an average $67.50 per kilo. This followed news on Tuesday last week that the spot price of polysilicon had dropped 5.1% to $74.4 per kilo in May from $78.19 in April.

Spot prices reached a peak of more than $450/kg in May 2008 due to significant supply shortages, but then declined to approximately $250/kg in the fourth quarter of 2008 and $58/kg in the fourth quarter of 2009 as supply increased and demand growth slowed due to the financial crisis, according to Solarbuzz. Last year, prices were generally on the rise and reached about $80/kg in the fourth quarter of 2010.

Long-term contract prices are significantly more stable, but polysilicon prices are expected to come under pressure again as the construction of more plants will eventually lead to an oversupply of this raw material. However, OCI believes that the large scale and integrated nature of its manufacturing plants together with its low cost base and the high purity of tis polysilicon will help it to maintain a key advantage versus the competition. And investors seem to agree.

According to a source, the deal was about two to three times covered and attracted about 50 investors. One of the reasons the company chose to do a fully-marketed deal was to broaden its institutional investor base outside Korea, but because it cut the roadshow short, US investors only got one day to meet the management. As a result, most of the demand came from Asia, complemented by a couple of significant orders from long-only funds in the US.

Orders from Asian institutional investors picked up strongly on Thursday, the fourth day of the roadshow, which gave the bookrunners the confidence to close the books early and avoid any further volatility in the share price. Overall, OCI’s share price fell 3.1% during the five-day roadshow, and it is now about 18% below the record high of W640,000 that it hit at the end of April. However, the share price has tripled in the past 12 months alongside its rapid growth as a polysilicon producer, a business that it got into as recently as 2008. The company’s domestic shares are also very liquid with about $150 million to $200 million of turnover per day and, as a result, most of the GDR issue is expected to be converted into domestic shares fairly quickly.

The final offer comprised 14.888 million GDRs, of which 12 million were backed by new shares and the rest by Treasury shares. The company had initially flagged that it may sell up to 15.6 million GDRs, but since it only had board approval to raise $700 million, that number had to be trimmed somewhat after the price was fixed at $47.0176. One common share is equal to 10 GDRs and the final deal size translates into 6% of the enlarged share capital.

OCI will use the proceeds towards the construction of two new polysilicon plants as it seeks to triple its annual production capacity of to 86,000 tonnes by the end of 2013 from 27,000 tonnes at the end of last year.

Barclays Capital, Credit Suisse and Royal Bank of Scotland were joint bookrunners for the deal.

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