Powerchip breaks six-week drought for Asian convertibles

The DRAM manufacturer makes use of positive sector momentum to raise $303 million in a combined GDS offering. The CB is attractively priced, with bankers terming it a "no brainer".
Taiwanese memory chipmaker Powerchip Semiconductor last night (June 26) became the first Asian company in six weeks to raise fresh capital from a convertible bond issue. It completed a $303 million combination deal that also included a sale of global depositary shares (GDS).

Coming one day after Hynix Semiconductor completed a heavily oversubscribed $1.5 billion share sale, the deal was no doubt timed to take advantage of the current positive momentum in the sector. However, CB specialists say the bond was definitely priced to make it attractive in its own right.

There was no information on oversubscription levels for this deal last night, but market participants say the fact that both tranches were priced at the tight end of their indicative ranges û in the case of the GDS actually even tighter than the original guidance û showed there had been no shortage of interest.

The bookbuilding, which was originally planned to go on for two days, was accelerated and wrapped up in one.

According to sources, the company sold $135 million worth of zero coupon convertible bonds and $168 million worth of GDSs with Deutsche Bank acting as sole bookrunner on both transactions. Together, the two tranches equal about 9% of the company's existing share capital.

The CB, which is only the second convertible from a Taiwan issuer this year, includes an option to increase the size by up to $25 million. This option can be used within 30 days.

According to a term sheet, the DRAM manufacturer will use the proceeds to buy equipment and machinery for the expansion of its 12ö fabrication plants. Only two weeks ago, the company borrowed the equivalent of $1.2 billion from a group of 10 domestic banks for the same purpose.

The bonds, which have a five-year maturity with a two-year put, were priced with a conversion premium of 12% over yesterdayÆs closing price of NT$19.60. They were offered to investors in a narrow premium range between 12% and 15%. They were marketed with a fixed yield to put of 1.25%, although in reality this will be higher as the bonds were sold below par.

The conversion premium looks attractive, especially in combination with an implied volatility of 30% and a 100-day historic volatility of just over 39%. PowerchipÆs share price has also fallen 17.6% from its 2006 peak of NT$23.80 on May 8 during the recent market sell-down - in line with the rest of the sector but underperforming the 13% drop in the broader market

Based on the companyÆs outstanding two CBs that mature in 2009 and 2010, the credit spread was assumed at 250 basis points over Libor and market participants said the bookrunner provided asset swaps for about half the deal at that level. The bond floor was set at 86%.

Other assumptions included full dividend protection and a stock borrow cost of 5%. There is an issuer call after two years subject to a 125% trigger.

What made the bonds really attractive to investors though, was the fact that they were sold at 98.25% of par after being reoffered in a range between 97.75% and 98.5%.

According to people familiar with the deal, the reoffer was a result of the CB issue having been filed with the Taiwanese regulators back in February with conversion premium and yield ranges that would have been considered inadequate in the current market environment where interest rates are higher and the risk appetite lower.

Powerchip could have refiled, but obviously decided not to do so - most likely because it can take up to four weeks to get a new approval. That meant the only way the company could compensate investors for the changed market environment was to reoffer the bonds at a lower price, one observer says.

Under normal circumstances a price below par will eat into the bookrunnerÆs fees, but in the case of CBs that are reoffered to compensate for a shift in the market it isnÆt uncommon to see the issuer actually reimburse the bank for any loss of income. Last night market participants were speculating that this could have been the case on this particular issue as there would have been little reason for the bookrunner to launch the transaction otherwise.

Another attractive feature on the bonds was the conversion price reset which will kick in if the share price is still below the original conversion price after 18 months. The reset is subject to a floor of 80% of the initial conversion price.

One CB specialist calculated the theoretical fair value of the bonds to be at least 106%, which would suggest an immediate pickup of almost eight basis points given the below-par pricing.

ôInvestors would have liked that there was some credit protection and in addition to that there is a coupon reset which gives them downside protection as well. IÆd say this issue was moving into the territory of a no-brainer, although to get anything done after 1.5 months in this volatile a market it had to be a no-brainer,ö he notes.

Powerchip is a frequent issuer in both the CB and GDS markets, having been back every year since it issued its first convertible in May 2001, which means investors know and understand the company. On the other hand, sources note that the share price has a habit of trading down in the wake of each issue.

The company also sold 29.215 million GDSs û each accounting for 10 common shares û at a price of $5.749 per unit. The final price translates into a price per common share of NT$18.816, or a discount of 4% versus the MondayÆs closing price in Taipei. The GDS tranche was marketed at a discount ranging from 5% to 10%.

The company initially offered between 23.215 million and 29.215 million GDSs in the deal, which was launched before the start of Taiwan trading yesterday to get a full day of marketing. Even with the deal in the market the share price held up well, however, and closed unchanged on the day.

The Powerchip transaction was said to have attracted a broad range of investors, including long only funds, hedge funds and CB specialists, which some investors buying into both the CB and the GDS. CB specialists have had nothing to buy in this region since a S$250 million ($159 million) offering by Singapore property developer and landlord Keppel Land on May 16. That deal was also brought to market by Deutsche Bank.

Since then, global equity markets have seen a sharp sell-off that have kept potential issuers on the sidelines. However, manufacturers focusing on DRAM and NAND flash chips in particular have staged a modest recovery lately amid forecasts that the third quarter will see firmer selling prices and a pickup in demand, creating a slight window of opportunity which Powerchip was quick to grab.

Momentum was further underpinned yesterday as Morgan Stanley published a positive outlook on TaiwanÆs DRAM makers, which included an upgrade of Powerchip to ôoverweightö.

ôWe expect pricing to stabilise in July, increase slightly in August and September and peak in Octoberà.which should improve PowerchipÆs profits and margins,ö analyst Frank Wang said in the research note. ôOn a cyclical basis, we expect a DRAM upcycle in 2H07 to 2008.ö

Among the Taiwan DRAM makers, Inotera rebounded 2.6% and Nanya Technology bounced 2.1% in response to the Morgan Stanley call, while in Korea Hynix rallied 9.2% yesterday after its sale of mainly secondary shares on behalf of its creditors was done at a modest 2.2% discount.

¬ Haymarket Media Limited. All rights reserved.
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