Powerchip raises $440.8 million...

but not without a struggle.

Taiwanese DRAM manufacturer completed a combined equity offering on Friday, raising $150 million from a convertible bond and $290.8 million from a GDR. The transaction proved to be one of the most testing equity deals of the year so far, with very little turning out as planned for joint bookrunners Deutsche Bank and Lehman Brothers.

The overriding stumbling block was the prospective issue size, which would have been ambitious for a second tier electronics company even in the best of market conditions. Splitting the deal into two components made it slightly more digestible. But it was still heavily critisized by outside ECM bankers who thought it irresponsible to push an overly large deal onto such a fragile market and speculated where the paper had been placed.

The situation was further compounded by an aggressive valuation, which made an already challenging deal exceptionally difficult to execute. This stemmed from the fact the deal was filed one month ago, when market conditions for convertible bonds were far more favourable.

The deal leads could have re-filed the deal, but chose not to because Powerchip was determined to book proceeds before the end of June. The company also suddenly decided to launch the deal on Thursday night even though it was warned many investors would be absent because of a looming public holiday in the US and a global convertible bond conference organised by Credit Suisse First Boston.

This left the leads scrambling to launch a transaction after the market's close on Thursday and books were not opened until 7.30pm - a time when most transactions would normally be wrapping up. Things then went from bad to worse after one of the banks misread Powerchip's closing spot price and inadvertently gave investors inaccurate information causing widespread confusion.

By this point, Asian investors had long gone, European investors were winding down for the day and deal momentum was non-existent. The leads consequently decided to hold pricing over until Asia's morning to give themselves time to renegotiate with accounts.

A deal was finally priced at 8am.

Throughout the process, Powerchip was keen to maximise proceeds and while it had to downsize the convertible, it was able to raise the full amount from the GDR. Its original filing was for a 35 million to 40 million unit deal and it issued 40 million units on a 10 for one basis.

Having pitched the deal on a 5% to 10% discount range, the transaction was priced at $7.27 representing a 10% discount to the company's spot close of NT$27.10. This kind of discount level is fairly standard for the DRAM sector. It is where Powerchip priced last year and PROMos priced in March.

Books are said to have closed about 1.2 times covered with participation by about 50 accounts. Most investors were highly price sensitive and a steeper discount would have undoubtedly ensured a healthier order book.

However, the convertible bond made this difficult, since a higher GDR discount would have reduced investors' appetite for the equity-linked deal.

As it was, the convertible was effectively downsized from $280 million to $150 million with the addition of a $30 million shoe. At this level, specialists say a deal could be comfortably allocated and trade up in the secondary market after closing 2.8 times covered.

The main problem Powerchip faced were Treasury yields, which have moved about 75bp over the past four weeks. This made a zero yield structure for a weak credit unappealing to accounts.

The five-year deal had an issue and redemption price of par, zero coupon and two-year put at par. The premium was marketed on a 25% to 30% range and priced at 25% to the stock's spot close.

To give investors additional downside protection, the deal also incorporated a conversion price re-set after 18 months. The deal is also callable after two years subject to a 125% hurdle.

Underlying assumptions comprise a bond floor of 88% and implied volatility of 41% based on a credit spread of 400bp over Libor and 45% volatility assumption. There is no dividend or stock borrow.

Implied volatility at these levels is very expensive, although specialists argue there is very little Powerchip paper available, since all the previous deals have been converted. The group's last transaction of September 2003, for example, is currently trading at a bid/offer spread of 175%/177%.

Specialists say there was almost no asset swap demand from the 60 accounts that participated in the deal. Most were taking a view on the DRAM cycle.

Over the last 10 weeks, Powerchip has slumped from a year-to-date high of NT$39.60. Having traded up to 2.2 times 2004 book, it is currently quoted around the 1.53 times level. Year-to-date it is up 50.60%.

Analysts point out that DRAM stocks are more highly correlated to movements in spot prices than earnings announcements or analysts' stock recommendations. As a result, some believe Powerchip may soon re-bound.

Industry monitor DRAMeXchange is currently forecasting a more bullish bias. In a recent release it said that "prices for June will maintain current levels and may increase next quarter as most PC OEM's still need more DRAM to prepare for the peak season."

At the end of the first day's trading, Powerchip's stock price dropped by its daily limit to NT$25.3, while the convertible was just below par.

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