ProMOS tender nearly there; deadline extended again

Soft indications of support for the bond buyback suggest the acceptance rate will be above the 79% needed for the deal to succeed, but analysts warn of more troubles ahead.

ProMOS Technologies announced yesterday that more than 79% of its convertible bondholders had indicated their intention to either accept the tender offer or to withdraw a request for the bonds to be redeemed when the offer closed on Saturday.

While this is the first time the company has said that the support is above the minimum acceptance rate of 79%, it doesn't mean that the tender offer has definitely succeeded -- yet. A large portion of the above mentioned support is still only in the form of "soft indications", according to one source, and for the offer to go through they need to be turned into hard acceptances. "Assuming nobody backs out, it is looking good, but they aren't there yet," the source says.

The Taiwan-based memory chip maker is offering, through Citi, to buy back the entire $335.615 million that remains outstanding of a zero-coupon bond due 2012 after it failed to meet its obligations with regard to a put option that took effect on February 14.

Notably, many of the bondholders have said that they intend to accept the offer only if the company pays 25 cents to the dollar, irrespective of whether the acceptance rate reaches the thresholds that will warrant a success premium or not.

In a move that suggests it is willing to pay that price, the company extended the tender deadline until 2pm London time on Friday (March 27). It has previously extended the early tender deadline twice. Under the original terms of the offer, bondholders who tendered their CBs by the early deadline would receive a premium of 10 cents for every dollar of principal, on top of the 10 cent base offer. The original terms also included a success premium of 3 cents per dollar if the acceptance rate is between 82% and 86% and a premium of 6.5 cents if it is at least 86%.

The source said that if all bondholders who have indicated their intention to accept the tender do so, the acceptance rate will be above 80%, but probably not as high as 86%. However, the company does have some flexibility in terms of the payout amount thanks to a strengthening of the Taiwan dollar since the tender financing was arranged. As a result, the NT$3 billion loan will now buy slightly more US dollars and since a payout of at least 25 cents turned out to be something of a make-or-break issue for quite a few bondholders, ProMOS appears to have decided to grant their wishes.

ProMOS share price rallied another 6.7% yesterday on the news, following a 12.5% gain on Thursday and Friday as the threat of the deal failing -- which has been acting as an overhang on the share price -- has been substantially reduced.

However, analysts argue that even if the tender succeeds, which seems highly likely based on yesterday's announcement, this is only the very first hurdle that the cash-strapped company needs to overcome to stay in business. In fact, some view it as nothing more than a way to delay an inevitable bankruptcy filing.

The deeply discounted tender is designed to remove the majority of the CBs from the market and will reduce the company's high gearing ratio somewhat. However, the CB pays no coupon so there will be no immediate savings on interest costs and the tender will of course bring in no new capital.

As of the end of January, the company had an available cash balance of only NT$200 million ($5.8 million) after struggling with a negative cash flow in the second half of last year. ProMOS is under pressure as falling demand for computers led to a 36% decline in its sales volumes last year and an operating loss of NT$24.5 billion ($705 million) for 2008.

The NT$3 billion ($83.8 million) syndicated loan facility, which is led by Bank of Taiwan, guaranteed by ProMOS's chairman Min-Liang Chen and secured against company assets with a book value of NT$1.5 billion, can be used only to finance the tender and any drawdown is contingent upon the offer getting accepted by at least 79% of the bondholders.

And ProMOS needs new capital, both to refinance maturing debt and for investments in new technology that is viewed as crucial if it is to remain competitive. One Taiwan-based analyst notes that, partly due to a lack of cash, the company has made no investments into its plants over the past 12-18 months, while another estimates that it will need to raise more than NT$40 billion ($1.2 billion) in the coming three years to stage even a minimal turnaround, something which he believes is highly unlikely.

The domestic banks have already shown that they are not willing to extend any further loans -- ProMOS initially tried to arrange a loan of NT$5 billion ($147 million) with a group of domestic banks to allow it to make a slightly better offer to the bondholders but was unable to find willing lenders -- and a rights issue would be difficult amid the company's falling share price and numerous analyst sell recommendations. At the very least, it will have to come at a very steep discount and will thus be highly dilutive for existing shareholders. Also, the government has quite publically noted that it has no intention to bail out individual DRAM makers as part of its plan to consolidate companies within this industry into a recently created entity under the name of Taiwan Memory Corp to allow them to share technology.

To drum home his sell recommendation, the earlier mentioned analyst last month lowered his target price for ProMOS to NT$0, citing a "strong likelihood for bankruptcy".

So, while it appears that ProMOS will pull off the CB tender, it needs to immediately start working on getting its cash situation under control, or the current respite is likely to be a short one. 

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