Chartered Semiconductor Manufacturing has become the latest Asian company to successfully raise fresh equity capital from a rights issue, allowing it to cover its maturing debt obligations and fund future capital expenditure, among other things.
The Singapore-based chip maker said on Thursday that its S$464 million ($300 million) offer was 144% subscribed, including excess applications. This means that Temasek, Chartered's controlling shareholder, will buy only its proportional entitlement and that its stake in the company will remain unchanged at 59.4%.
It also means that none of the rights issues in Asia year-to-date have had to put their underwriting commitments to the test, as they have all been fully subscribed by existing shareholders or by investors buying rights in the market. HSBC's gigantic $17.7 billion rights offering, which was completed earlier this month, was only 96.6% subscribed, but the remaining shares were placed by the arrangers as a rump position.
These coverage ratios ought to be comforting for other companies looking to launch rights offerings of their own, and perhaps may also make the investment banks less concerned about putting their balance sheets at risk as they help arrange these deals. So far, most of this year's rights issues have seen the investment banks sub-underwrite their initial obligations.
The success of Chartered's rights offering was helped along by the fact that the company's Singapore-listed shares held above the offering price of S$0.07 throughout the offering period. Sure, the share price took a big tumble immediately after the offer was announced on March 9, falling 39% in one session to 12.5 Singapore cents, but since then it has closed above 10 Singapore cents on all but two days and since March 23 it has also held above the theoretical ex-rights price of S$0.106. As a result, investors were still able to buy the new shares below market price, even though the discount was nowhere near the size of where it was when the deal was first announced.
Ironically though, observers say part of the reason the share price held up was because some investors did not expect the take-up for the rights offering to be that great and were anticipating that Temasek may have to buy additional shares of up to 90% of the deal, as earlier committed. And that in turn might have prompted the government-owned investment company to privatise Chartered, supposedly at a slightly higher price -- or so the speculation went. As it were, this did not happen.
A slightly more positive outlook for the semiconductor sector over the past month has likely also helped set a floor for Chartered.
Investors displayed no particular enthusiasm about the oversubscribed offering with Chartered's Singapore-listed shares finishing unchanged at S$0.135 yesterday. This was the first reaction to the news since markets in both Singapore and the US were closed for Easter on Friday. However, the company's American Depositary Shares rallied in early New York trading yesterday. Two-and-a-half hours into the US session, Chartered was up 7.1% in an otherwise falling market.
According to an announcement issued after the Singapore market closed on Thursday, the offering was 95% covered when counting only the rights-based subscriptions for 6.50 billion shares. But excess applications for an additional 3.37 billion shares added a further 49%, bringing the total coverage ratio to 144%.
Chartered offered investors 27 new shares or ADSs for every 10 existing ones at a price of S$0.07 for each Singapore-listed share, or $0.46 per US-listed ADS. Citi, Deutsche Bank and Morgan Stanley acted as joint arrangers as well as joint underwriters for the 10% not covered by Temasek through its wholly-owned subsidiary ST Semiconductors. The Singapore price represented a 69.5% discount to the last traded price of S$0.205 before the announcement and a 34% discount to the theoretical ex-rights price of S$0.106. When the offering closed on April 6, the discount to the market price, which had fallen to S$0.13, had narrowed to 46%, although sources noted that the discount versus the market price was less interesting since Chartered is issuing more new shares than the number previously outstanding.
Following the rights offering, the company will do a reverse split, consolidating 10 of its existing shares into one new share, assuming shareholders attending its extraordinary general meeting on April 30 give their approval. Chartered says the consolidation will help reduce certain fixed costs and should also lower the share price fluctuations and trading volatility. And perhaps more importantly, it will also reduce the risk that its ADS price will fall below the Nasdaq requirement of $1 over a sustained period of time. If that happens, the company can potentially be forced to delist. Last Thursday, Chartered's ADS closed at $0.70.
Chartered has earlier said that the rights offering will improve its debt-to-equity ratio, based on end-December numbers, to 1.21 times from 1.46 times and its adjusted net debt-to-equity ratio to 0.70 times from 1.05 times. The strengthened capital position should help "preserve the confidence and commitment of its customer base", it has argued.
As of the end of December, Chartered had total debt obligations of $2.1 billion, comprising $1.8 billion of straight debt and $265.9 million in the form of convertible redeemable preference shares, which it currently believes are unlikely to be converted into ordinary shares. At the same time it had a cash balance of $594.1 million and unutilised credit facilities of about $1 billion, of which $750 are available only for equipment purchases for its Fab 7 plant.
Rights issues have been a key means for Asian companies to raise equity capital this year with several deals above $1 billion either already completed or currently in the market. DBS Group set the ball rolling with a $2.7 billion offering in January and Singapore developer CapitaLand closed a $1.2 billion deal last month. Still in the market are a $1.6 billion offering for Malaysia's Maybank and a $1.4 billion deal for Malaysian telecom operator TM International which are both set to close later this month. Among the smaller deals, a $335 million offering by Indonesia's Bank Danamon is due to close on Thursday.
According to data provider Dealogic, the first two months this year were the busiest January-February period ever in terms of rights issue volumes in this region with $2.5 billion worth of capital raised, versus $9.8 billion of equity capital markets activity overall. This compares with $1.4 billion of rights issues in the same period in 2008, which was a precursor for what was to become a record year with a total rights issue volume of $15.2 billion -- almost double that in 2007.
However, Dealogic doesn't count the pro-rata entitlement that is taken up by the controlling shareholder, meaning the actual volumes raised by the issuers can be several times larger. For instance, only 40.6% of Chartered's offering will be included in Dealogic's tables since the rest was taken up by Temasek under its entitlement, and of DBS's $2.7 billion deal, only $1.95 billion is included. The remainder was, again, bought by Temasek.
Still, the tables do provide some useful guidance on the rising popularity of rights issues in the past couple of years as companies have found it increasingly difficult to raise a meaningful amount of new equity through placements. So far this year, only four companies have sold new shares through placements and none of these deals were larger than $300 million.