Powerchip brings convertible

Taiwan''s largest DRAM manufacturer completes its debut convertible as prices for 128Mbit chips fall to an all-time low.

With Deutsche Bank as lead manager, Powerchip Semiconductor priced its second ever capital markets transaction at the end of last week, raising $175 million from a five year, zero coupon, rolling put deal. Backed by an issue price of par, the deal has a conversion premium of 10.7% to Thursday's NT$27.6 close and is convertible into either common share's or the company's existing GDR at NT$30.

The issue has also a two-year call option subject to a 135% trigger and a greenshoe of $25 million Co-leads are Credit Lyonnais and Nomura, with ABN AMRO, Grand Cathay, ING Barings and Powerchip Securities as co-managers.

Underlying assumptions include a bond floor of 92.9% based on a credit spread of 350bp over Libor and theoretical value of 103% based on implied volatility of 29.5% and historic (100 day) volatility of 67%.

Bankers comment that books closed two times oversubscribed after a roughly one week roadshow that took in Hong Kong, San Francisco, Los Angeles, Boston and New York. Because the deal was priced one day early, a presentation in London was cancelled.

Bankers argue that a roadshow was necessary to draw in pure equity investors. This resulted in a geographical split of 50% Europe, 30% US and 20% Asia, with equity investors comprising 40%, hedge funds 15% and outright accounts 45%. Two large anchor orders accounted for nearly the whole equity component of the book.

The low premium, which came at the bottom of an already low indicative range of 10% to 15%, underlines investors growing concern about the potential upside of convertible issuers, whose stocks have already shot up by 60% to 80% so far this year. Powerchip, for example, had risen 61.87% year-to-date on pricing last Thursday. On a p/e basis, it was trading at 11.56 times 2000 earnings.

The company also opted for a relatively short call feature and annual puts to fit its expectations about the DRAM cycle. Whereas investors wanted the security of a short put in case the cycle fails to turn by the end of the year, the company wanted a short call in a belief that it will have definitely turned by the end of two.

"Ideally, Powerchip would have liked to force conversion by incorporating a one year call," a banker explains. "Investors, however, wanted a bit more security."

It also forsook the recent trend towards two-year puttable deals because of a spike in secondary market yields. PROMos Technology, for instance has seen its treasury spread double from 100bp to 200bp in the space of just a month-and-a-half. Had it opted for a two-year puttable deal, Powerchip would consequently have had to contemplate a yield-to-maturity touching the 6% mark.

During roadshows, investors main concerns were concentrated on the DRAM cycle. Deutsche, Salomon Smith Barney and Morgan Stanley are three of the most prominent bulls, all predicting a turn in the cycle by the third or fourth quarter. Bears such as Merrill Lynch, by contrast, believe that prices could drop to as low as $3 per 128Mbit, well below most companies' manufacturing costs at the $4 level.

Powerchip, which began operations in 1996, has grown rapidly to become Taiwan's largest DRAM manufacturer and the world's seventh largest. Its roots lie in Japan as part of the Mitsubishi empire and it has seen revenue increase rapidly from NT$6.7 billion in 1998 to NT$19 billion in 2000.  

Proceeds from the deal will be used to build a new Fab. 


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