Singapore heavyweights consider equity markets

As Singapore Power whittles down potential bookrunners to four banks, Chartered Semiconductor is said to be considering its first convertible.

Despite the fact that Chartered says it has no "firms plans" to launch a convertible bond, market players believe that a $300 million to $500 million transaction is very much in the offing. A small number of relationship banks are said to have been aggressively competing for a deal, which would rank as Asia's only outstanding offering from the pure semiconductor sector, following the redemption of an $85 million issue by Taiwan's Orient Semiconductor.

Previously, banks have pitched the idea of an exchangeable offering to Chartered's majority shareholder government-owned Singapore Technologies, which remains keen to further reduce its 62.6% stake. This time round, however, specialists say that the company is keen to raise funds on its own account to build additional flexibility into its balance sheet as it finishes construction of its sixth wafer fabrication plant (Fab), at a total cost of $3.5 billion.

The company has already visited the straight equity markets twice, with a highly successful IPO completed in late 1999 and a more controversial $1 billion secondary offering in May 2000 at a time of heightened volatility on the Nasdaq. Both deals were led by Salomon Smith Barney. CFO Chia Song Hwee says that proceeds from the latter deal have yet to be fully utilized and in retrospect, most observers agree that raising equity at $65 per ADR seems like a wise move now that the counter is trading at $33.875.

Why Asian convertibles are hot 

Specialists comment that the rationale for a convertible structure stems from the combined impact of Chartered's low stock price, which makes fresh equity uneconomic, with the company's undoubted appeal to equity-linked investors. "There's a sharp divide between those convertibles that work and those that don't in the current market," says one. "Those that fall into the former category need to be of high credit quality and good liquidity. That it is to say, those companies which have a Nasdaq listing benefit because it's easier for investors to short the stock."

By contrast, most outstanding convertibles either trade as distressed debt or equity. "The supply/demand imbalance in Asia is even greater than it first seems because less than 7% of outstandings fit the risk/reward characteristics global investors are looking for," says one player. "Investors want bond floor, equity upside and volatility. The scarcity of high quality paper means that recent issues such as Samsung Electronics 2007 CB is trading at an implied volatility of 57.9%."

Another adds: "Investors have been bidding up paper, pushing the bond price higher, which makes the equity option more expensive and by default the implied vol as well."

A triple-A rated credit by geography, with the added bonus of majority government ownership and a strong balance sheet, Chartered would have strong appeal to fixed income investors according to analysts. The stock's inherent volatility, in tandem with a trading price that has been depressed by the downturn of the semiconductor sector and fall-out from the tech sector, would likewise make it attractive to equity investors seeking defensive characteristics.

Credit quality

However, despite the fact that Singapore has an Aa1/AAA credit ceiling, analysts believe that Chartered would likely command a low single-A rating, one or two notches behind the Development Bank of Singapore (DBS), which is also still majority government-owned, but felt to reside in a more stable sector.

On a fundamentals basis, Chartered has a strong balance sheet, with a net cash position of $924 million as of end December, according to CFO Chia. Against this, the company has $590 million in debt and a capitalization of $2.137 billion. This gives it a debt to capitalization ratio of 27.6% and in EBITDA terms, a net debt to EBITDA ratio of slightly over one times. 

Chia says that the company will be maintaining planned capital expenditure of $1.2 billion this year. "Part of this amount will be funded by cash and part by a credit line," he comments. "A subsidiary company owns and operates Fab 6 and is a joint venture which has organized a separate $820 million bank line to fund construction."

Acknowledging that Chartered would make an ideal candidate to raise convertible funding, he adds, "I don't rule it out as a possibility, but there is no concrete plan at the moment." 

Where is the semiconductor cycle heading?

Bankers consequently argue that funds would be used to enhance the company's balance sheet, either as a buffer in the event of a more prolonged downturn to the semiconductor cycle, or to re-boot capex should the sector emerge more quickly from its current dip. The world's three largest foundry manufacturers - TSMC, UMC and Chartered - have all been hit hard by a double whammy, in which slowing global demand has met rapid inventory build-up head on. Technology trends, which have seen foundries move from eight- to 12-inch wafers and 0.15 to 0.13 microns, also means that with more chips being built out of a single wafer, supply has been expanded further and prices depressed down. 

Chartered has been further hard pressed because about 55% of revenues now derive from communications-related chips - a sector which some analysts believe will take longer to revive than the more traditional PC sector.

As Deutsche Bank's David Wong argues: "The communications sector has been on a continual upswing for 10 years and only now are we starting to see growth plateau. Suppliers were completely unprepared for what happened last year and so the sector may take longer to sort itself out compared to the PC side, where suppliers have got used to much shorter cycles."

Capacity utilization

As a result, both Chartered and TSMC are reporting likely capacity utilization levels of only 70% during the first quarter, against 75% to 80% for UMC. Anticipating a pick up by the third quarter, Chartered further estimates that it will run at an annualized utilization level in the mid 80% area, compared to 102% during 2000. In turn, this will mean that gross margins will be down 10% to 12% over the first and second quarters, averaging out to 5% to 10% over the course of the year. 

In a bid to break Taiwan's duopoly and ride the industry trend towards outsourcing, Chartered has aggressively built capacity since 1998 when former Motorola executive Barry Waite took over as CEO. Since the last downturn in the third quarter of the same year, when industry capacity utilization dropped to 58%, Chartered has recorded eight consecutive quarters of strong growth and seen capacity double.

Were Chartered to now come to market with an equity-linked deal, bankers say it would mark the first from the sector since October when the last of 12 deals for the year were launched.

Singapore Power nears decision

An announcement that is likely to name two international banks as lead managers of the company's IPO is expected within days. From an original group of 10 banks, which bid for an expected $1 billion plus deal, the company has made two cuts to seven and now four.

Surviving a second round of bake-offs from the middle of last week are: Goldman Sachs, Merrill Lynch, Salomon Smith Barney and UBS Warburg. In a move that has surprised local bankers, the company's financial advisor, Credit Suisse First Boston, has been knocked out, as has JP Morgan, which led the company's debut international bond issue last April.

So too, Morgan Stanley Dean Witter, which was felt to be in danger of monopolizing the City State's forthcoming privatization drive, is gone. How this will now play out for UBS Warburg, which has similarly been prominent in recent offerings, but also said to have won much kudos for its methodical approach, remains to be seen.

A deal is expected in the third quarter.

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