Semiconductor Manufacturing International Corp (SMIC) returned to the equity linked market on Tuesday with a $450 million Reg-S only convertible bond offering that received a similar level of strong demand to its debut offering in 2013.
SMIC marketed the new deal at a base size of $300 million and was met with massive demand, which according to one source amounted to nearly six times the deal size.
Such strong demand allowed sole bookrunner JP Morgan to enlarge the deal by another $50 million on top of the $100 million upsize option that was stated as part of the offer terms when the deal launched.
In addition, SMIC could raise additional capital from three existing shareholders – Datang Telecom, China Integrated Circuit Industry Investment Fund (China IC Fund) and China Investment Corp (CIC) – who could exercise their pre-emptive rights to subscribe for more bonds in order to maintain their current shareholding, subject to shareholder approval.
Should they decide to exercise the rights in full relative to the final deal size, SMIC could raise an additional $274 million based on the three companies’ combined shareholding of 37.86% in the chip maker.
Final terms of the unsecured bond, including zero coupon, zero yield and a conversion premium of 34.06%, was similar to the company’s existing $295 million convertible bond due 2018, although the new deal was structured as six-put-four compared with five-put-three for the old deal.
The bond was offered with an initial conversion premium of 30%-35%, with full dividend protection and an issuer call after four years subject to a 130% trigger. It can be converted into SMIC's Hong Kong-listed shares.
The new deal was marketed at a time when existing bondholders are getting closer to the October 2016 put date, when they can sell the old bond back to the company.
It has also effectively increased the strike price to HK$0.925, which is close to SMIC's HK$0.93 all-time high, compared to HK$0.7965 for the existing 2018s.
Some market participants were incentivized to swap their existing note into the new deal given that the latter turned out to be slightly cheaper in terms of implied volatility.
Based on underlying credit assumptions of 250bp over Libor and a 50bp borrow cost, the new 2022s would result in an implied volatility of 31% compared to nearly 40% for the existing 2018s at the current trading level.
SMIC was able to retain the level of interest because it is a well-known company and many investors are familiar with its credit. In fact, it is the only repeated issuer among all convertible debt issuers in Asia ex-Japan so far this year.
The new 2022s were indicated at a bid/ask of 100.875%/101.375% immediately after launch in the grey market before widening to 101.325%/101.875%, according to a bond trader.
Outbound M&A
One source told FinanceAsia that the outcome of the transaction implies that market demand for solid investment grade credit remains strong. SMIC, rated BBB- by Standard & Poor’s and Baa3 by Moody’s, is one of China’s leading semiconductor foundries and is supported by a number of government-related entities.
CIC, China’s largest sovereign investment fund, injected $250 million into SMIC in 2011 to help the company weather a turbulent market after the global financial crisis. SMIC received another $400 million investment from China IC Fund in 2015, while Shanghai Integrated Circuit Investment Fund agreed earlier this year to invest a combined Rmb20 billion ($3 billion) into SMIC and two other semiconductor companies in the future.
Beijing has become more supportive of domestic semiconductor makers since 2014 when the State Council unveiled initiatives to improve self-sufficiency and develop a world class semiconductor manufacturer.
Since then many Chinese firms have sought outbound acquisitions at various stages of the semiconductor value chain.
Jiangsu Changjiang Electronics Technology, which is widely regarded as a leader in chip testing and assembly in China, purchased Singaporean semiconductor packaging company STATS ChipPac for $1.8 billion in late 2014.
Tsinghua Unigroup, a leading Chinese semiconductor design firm, spent $9.4 billion in a series of outbound acquisitions that included a 15% stake in US data storage firm Western Digital and 25% respectively in Taiwanese semiconductor duo Silicon Precision Industries and Powertech Technology.
Now many industry watchers expect SMIC to follow suit to embark on foreign acquisitions and it appears the company will have sufficient cash for a sizable M&A deal after the convertible debt offering.
SMIC could have as much as $2 billion in its war chest after the bond deal assuming the existing shareholders subscribe to additional bonds. Meanwhile, its relatively low gearing of 39.3% as of the end of March also provides room for further debt financing.
The company will use the proceeds from the bond sale for capacity expansion and general corporate purposes, according to a termsheet.
An outbound M&A would provide a much needed upside for SMIC, which has seen its shares largely trading between HK$0.6 and HK$0.8 since the beginning of 2014.
This article has been updated to reflect that existing shareholders will require shareholder approval to exercise their pre-emptive rights.
