Powerchip prices CB

One week investors have to contend with the prospect of negative yields; the next they come up against the novel concept of negative conversion premiums.

Lehman Brothers completed a $90 million convertible for Taiwanese DRAM manufacturer Powerchip yesterday (Thursday) with books closed after just one hour of marketing. At this point the deal was roughly five times oversubscribed as investors flocked back into the idea that DRAM prices are finally recovering.

However, the deal had a very unusual structure based on the fact there was not a single credit bid in the market. Back in December when Powerchip last tapped the convertible market via Nomura, the lead was only been able to find asset swap demand for a quarter of its $90 million deal. This appears to have eaten up any remaining credit lines in Taiwan, where banks remain wary of increasing lending to such a highly geared sector.

Structuring a deal was further complicated by Powerchip's lack of profitability in 2002, which meant that any prospective offering had to have a zero coupon, zero yield structure. What the lead came up with is a deal with a high equity content that should encourage conversion and help Powerchip to de-leverage its balance sheet.

From the company's standpoint, a convertible is said to have been preferable to a GDR because Powerchip management did not want to run the risk of what might happen to such a volatile stock during a protracted marketing period. From an investor's standpoint, the deal looks like a secondary placement, but has the added security and comfort of a bond floor, should the stock price sink as rapidly as it has risen.

On this basis, market participants thought terms very attractive.

They comprise a five-year maturity with a zero coupon and conversion price at a 4.5% discount to the stock's NT$15.3 spot close. The deal cannot be converted for an initial 30 days from completion and is callable after two years subject to a 125% hurdle and puttable every year at par.

It also has a conversion price re-set after six months subject to an 80% floor and every year thereafter. Alongside the lead, syndicate members also included Deutsche Bank and Nomura. The greenshoe potentially brings proceeds up to $112 million.

Final terms compare to a pre-marketed range of a 10 to 12 month put option, four to six month re-set and a conversion price at a zero to 5% discount to last trade.

A total of 95 investors were counted in a book, which was dominated by equity accounts and a smattering of CB funds.

The negative conversion price discount comes hard on the heels of a spectacular rally, which has seen the share price soar116% since May 16. Just over a month ago, the stock hit its 52 week low and relative to this price, the deal came at a 106% premium. It also traded limit up on the day of pricing and has strongly outperformed the TWSE, currently up 13.396% on the year.

However, while the stock has climbed sharply, it is still trading on a very cheap historic valuation. At 1.4 times price to 2003 book, Powership remains far below the sector's last peak in 2000 when stocks topped the six times mark. Key to the current rally is whether DRAM prices can sustain their current upwards trajectory.

Analysts have been cautious but relatively positive, since inventory levels remain low and the peak season for consumer spending is yet to come.

Supporters also add that Powerchip's association with Elpida gives it a strong base to expand market share. Together the two account for 10% of the global DRAM market and Powerchip is one of the few with an operational 12-inch fab. Earlier this month, the company also stated that it believes it will be able to break even again by July.

The new convertible may be further bolstered in secondary market trading by the performance of its predecessor. The December deal has now hit its conversion price and after the black-out period ends, bankers believe a number of bonds will get converted, potentially freeing up some asset swap.

On a theoretical basis, the new deal has a bond floor of roughly 93% based on an asset swap bid of 600bp over Libor and a bond floor of 94% based on 500bp over.

Within a few hours of launch it was being quoted at 102% to 103%.