Powerchip prices CB

The Taiwanese DRAM manufacturer prices a highly defensive deal.

Nomura Securities priced a $90 million convertible for Powerchip Semiconductor Corp (PSC) after London's close yesterday (Monday) following a one-day bookbuild. The deal came at the cheap end of terms, but given the continuing lack of visibility for DRAM spot prices, the company is likely to view completion as a minor victory over market conditions.

The deal has a five-year annual puttable structure, with a zero coupon, zero yield and par redemption. The conversion premium was set at 14% to a closing share price of NT$12.40, the bottom end of a 14% to 23% indicative range. There is also a call option after three years subject to a 130% hurdle.

But the real value for investors lies in the multiple re-sets. In common with a number of defensive CB structures, the deal has a standard re-set with an 80% floor that kicks in six months after the issuance date and every year thereafter. The new deal, however, also has special compulsory re-sets activated one month before each put date. At this point, the conversion price will be automatically re-set to 91% of the prevailing share price and gives investors the option to convert for a seven-day window.

In this respect PSC's deal differs to Chunghwa Picture Tubes, whose recent $125 million transaction also had a special re-set at the discretion of the issuer. PSC, on the other hand, has no control over investors, who can either choose to convert the issue, hold it or put it.

The re-sets were necessary to sell an uncertain equity story and a weak credit, whose convertible also has a very low bond floor for a stock with no available borrow. Using the lead's assumptions, the deal has a bond floor of 92.5% based on a credit spread of 600bp over Libor. Implied volatility comes out at 19% and using a 35% volatility assumption, fair value stands at 105.5%. Historic volatility is said to be 64%.

Books were said to have closed one-and-a-half times covered with participation from just under 50 investors. Getting the deal across the finishing line was said to have been aided by three to four key accounts which placed 15% plus orders and took a view that the DRAM sector is about to turn.

There was also said to have been a credit bid for about a quarter of the deal and by investor type the book was fairly evenly split between outrights and hedge funds. In terms of geography, 60% went to Europe, 35% to Asia and 5% to the US via 144a.

Proceeds will help the company ramp up the first phase of its new 12" fab, which is scheduled to start producing 10,000 chips by the end of the year. Thanks to its recent alliance with Elpida and Mitsubishi Electric, Powerchip has also been able to stem ongoing concern about its future prospects within a rationalization of the DRAM industry. From 20 independent manufacturers in 1995, the industry is now to five main groups led by Samsung Electronics, Micron and Hynix, which occupy the top three slots followed by the Elpida grouping and then Infineon, which has previously tied up with Nan Ya and ProMos.

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