ProMOS attempts CB buyback after failing to meet puts

The Taiwanese DRAM manufacturer secures a syndicated loan to cover a tender at 26.5 cents on the dollar, but more debt redemptions ahead suggest the company's troubles are not over.

ProMOS Technologies is joining a growing list of Asian companies trying to restructure their debts to ease the pressure imposed by falling equity and bond prices as well as difficult operating conditions. According to a statement issued Friday, the Taiwanese memory chip maker is offering to buy back all its outstanding zero-coupon convertible bonds due 2012 at a maximum price of 26.5 cents on the dollar. If all bondholders were to accept the offer it will cost the company $88.9 million, which compares with an initial principal of $350 million.

Contrary to earlier CB buyback offers by KCC and Olam, and the straight buyback tenders by Galaxy Entertainment and Nine Dragons, where the companies were primarily taking advantage of low bond prices to reduce their gearings, cut their interest costs and book a bit of a profit in the process, ProMOS has been forced into this action since it was unable to meet its obligations with regard to a put option. The company said 97.4% of the CBs were put back on February 14.

Since the CB was puttable at par and there is currently $335.615 million worth of bonds left in the market, it would have cost ProMOS $326.9 million to honour the bondholders' requests for redemption -- money that the company doesn't have and has not been able to raise through other means.

According to Friday's statement, ProMOS posted an operating loss of NT$24.5 billion ($705 million) in 2008 and had a cash balance of only NT$200 million ($5.8 million) at the end of January (excluding cash tied up as security for loans). This is a sharp deterioration from NT$2.6 billion in its cash balance at the end of June 2008 and caused partly by a negative cashflow.

A buyback tender has been anticipated in the market for some time, since it was well known that the company would not be able to cover the put. In fact, ProMOS was also unable to meet a scheduled principal repayment of NT$830 million on a term loan from 2005 in December, forcing it to apply to the Taiwan government for a 12-month exemption from the repayment requirements. The application is still pending.

And with the Singapore-listed CB trading at only 20% of the principal value and the share price hovering well below the conversion price, according to Bloomberg data, there was little doubt that most bondholders would use the right to sell the bonds back to the company. ProMOS has been working with Citi for a couple of months to find a solution.

Press reports from Taiwan had suggested that ProMOS was trying to arrange a loan of NT$5 billion ($147 million) with a group of domestic banks, suggesting that the company may initially have planned to make a slightly better offer to the bondholders. However, that loan didn't materialise. The company said in Friday's statement that it has secured a new NT$3 billion ($83.8 million) syndicated loan facility led by Bank of Taiwan, which is guaranteed by ProMOS's chairman Min-Liang Chen and secured against company assets with a book value of NT$1.5 billion. The net proceeds after deducting the arrangement fee and expenses will be NT$2.9 billion. While still subject to finalisation by the participating banks, this facility represents the company's "entire and only source of funding for this tender offer".

Given these limitations, ProMOS's base offer is to repay the bondholders 10 cents for every dollar of principal they own. However, bondholders who tender their CBs before 2pm London time on March 2 will receive an early tender premium of 10 cents and there is also a tender success premium of up to 6.5 cents which will be paid if an acceptance rate of at least 86% is achieved. If the acceptance rate is between 82% and 86%, the success premium will be 3 cents per dollar.

The banks participating in the syndicated loan hold ProMOS CBs with an aggregate principal amount of approximately $40 million, or 11.9% of the outstanding principal. According to the company, they have indicated that they will not tender these bonds and will also revoke the put notices that they have already delivered to the company. These bonds will not count towards the calculation of the success rate or the minimum acceptance rate of 79%, below which the company won't go through with the deal. The offer expires on March 21.

ProMOS said it has "exhausted all possible options to secure the required funding to meet the redemption obligation". Among other things it has investigated the sale of certain manufacturing equipment, additional secured loans, and new issuance of public or private market debt, equity or convertibles.

"However, due to the challenging market factors...and ongoing operational cashflow losses, we were unable to secure the funding to meet the redemption requirements in full. We believe the syndicated loan we have secured is the best available option to us in the current market," the company said.

In addition to the put obligations on the CB and the NT$830 million repayment that was due in December, ProMOS has another NT$19.2 billion ($555 million) of principal payments on its debts coming due in 2009, indicating that a more severe debt restructuring will be needed.

Indeed, the company said that if the tender is successful it may undergo an extensive restructuring and consolidation plan in consultation with various industry players and the Taiwanese government. If the tender fails, it said it will "continue to investigate alternatives" and may consider any legal means available to pursue the best interests of its constituents in response to any legal action initiated by its creditors.

At first glance, ProMOS is thus in a similar situation to Asia Aluminum, which launched a tender offer with respect to a high-yield bond and two series of payment-in-kind notes a week ago amid a thinly veiled threat of bankruptcy should the offer not be accepted. However, while some of Asia Aluminum's bondholders are arguing that they are being short-shifted and that there ought to be other alternatives to the low buyback offer, observers on Friday said ProMOS genuinely seems to have run out of options.

The DRAM industry is suffering as the economic downturn has led to a decline in the demand for computers. At the same time, industry players have continued to add manufacturing capacity and invest more in advanced technologies, resulting in rapid supply growth and a sharp decline in average selling prices for DRAM chips. ProMOS noted that the average sales price remains at or below cost for several DRAM manufacturers and said the deteriorating industry conditions contributed to a 36% decline in its sales volumes in 2008 versus the previous year. In another example of the tough operating environment, German-based Qimonda -- a direct competitor of ProMOS -- filed for bankruptcy in January.

The industry downtrend is also clearly evidenced in ProMOS's share price, which has tumbled 85% since April last year to Friday's close of NT$1.28. It fell 24% between Tuesday and Friday last week as investors awaited the company's announcement about its plan for the CBs. 

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