ProMOS prises Taiwanese CB market back open

DRAM manufacturer brings first benchmark equity-linked deal from country since January.

ProMOS Technologies took advantage of a re-bounding share price to raise $200 million from a convertible bond issue yesterday (June 15). The company initially went out with a deal size of $150 million, but the offering was upsized by lead manager ABN AMRO Rothschild after the order book closed four times covered. There is also a $25 million greenshoe.

Prior to ProMOS, only four Taiwanese companies had accessed the equity-linked market so far this year raising just $450 million between them. By contrast 22 companies accessed the market over the same time period in 2004 raising a total of $3.64 billion.

Issuers' reluctance to execute transactions has been the result of declining share prices and rising interest rates, which have made deal structures unattractive. In turn, there has been a marked withdrawal of the investor base: whether it be because hedge funds have lost money and have no volatility to play with, or Taiwanese banks have simply turned their backs on the offshore asset swap market.

Bankers say the latter issue is still a problem, with most Taiwanese banks reporting little credit appetite for dollar denominated CB's thanks in part to a thriving NT$ denominated market. ABN was able to solve this problem by using its own credit lines to provide asset swap.

It is one of the few banks able to do so thanks to a sizeable corporate loan book in Taiwan and a long lending relationship with ProMOS. The Dutch bank also led the company's last $94.5 million CB in October 2003, which needed a credit-enhanced structure because it had reported negative net earnings the year before.

Specialists estimate that roughly two thirds of the 60 investors in the order book were looking for asset swap. Up to 50% of the bonds were then stripped in the primary market.

Deal terms comprise an issue and redemption price of par, zero coupon and two-year put at 110.07% to yield 6.5%. This represented the outer end of a marketed range between 5.5% and 6.5%.

The conversion premium was not marketed under a range, but fixed at NT$15.29, which represented a 12% premium to the stock's NT$13.65 close. There is also a call option after one-and-a-half years with a 125% hurdle.

The equity sensitive nature of the deal was further re-inforced by two re-sets - one after six months and one 45 days prior to the put date.

Specialists say the credit was being bid at 400bp to 450bp over Libor. At the wide end of this range, the bond floor comes in at 97% and at the tight end at96%.

Implied volatility was priced at 17% versus 10-day volatility of 25% and 30-day volatility of 26%. Specialists say no investors are currently willing to look at 100 or 260-day volatility, which falls in the low 30% range.

Based on these underlying assumptions, the deal has a theoretical value of 101% to 101.5%.

Specialists conclude that investors are looking for highly defensive, short-dated structures with a high degree of equity sensitivity. Non-syndicate banks concurred that terms on the ProMOS deal are fair and what was needed to try and kick-start the CB market back into action.

In turn, ProMOS was willing to accept them because it needs to raise funds for capex. The company has estimated it needs NT$29 billion ($925 million) in 2005 and does not have the operating cash flow to meet it.

So far the company has raised NT$5 billion ($159 million) from a syndicated loan, but has also said it hopes to raise $200 million to $300 million from a GDR issue, which will overhang the stock until later in the year.

On full conversion, the new CB will dilute existing investors by 9%.

Year-to-date the stock is down minus 3.87%, but has re-bounded strongly since a low of NT$10.6 on April 21. Since then it has climbed 28.7%.

It is currently trading a fraction over book value, but at its customary discount to comparables Powerchip and Nan Ya Technology. Analysts have mixed views about future price performance.

Most agree that commodity DRAM prices bottomed out at the beginning of the second quarter once they got down to the level of manufacturers' cash costs. As a result, DRAM manufacturers are expected to report a big drop in earnings in the second quarter and a number of houses believe ProMOS will report a loss.

They believe the cycle will start to turn in the third quarter, but some argue that ProMOS will not start to show earnings momentum until 2006 because it will encounter transition issues for the rest of this year.

Firstly, the company broke off its technology partnership with Infineon last year and has now tied up with Hynix. However, this means it is now transitioning from trench to stack technology, which it has not employed before.

Secondly, ProMOS will be the last of the three Taiwanese manufacturers to migrate from DDR to DDR2 and upgrade to the next process technology - 0.11um. Its DDR2 capacity is not expected to come on stream from its new 300 million fab until the end of the year and some analysts believe it will face yield issues during the ramp up phase that will put pressure on margins.