Described by Chairman and CEO CS Park as the first market-driven restructuring in Korean corporate history, Hynix's $1.25 billion GDR stands almost unique among global public equity offerings. At its crux, lies an interdependence of GDR and bank re-financing, such that the latter has been wholly contingent on the completion of the former.
The debt rescheduling, which accompanied the deal and is said to give the company an 18 month window even if DRAM prices fail to recover, makes Hynix's re-capitalization one of the most complicated offerings Asia's markets have seen to date. Yet, for lead manager Salomon Smith Barney, its ultimate success should now consolidate the bank's standing as the region's premier equity re-capitalization house.
For Korea Inc, it was always abundantly clear that the re-capitalization had to get done at almost any cost. Should the company have failed to persuade enough equity investors of its long-term viability, the government would have been faced with two equally unappealing options. It could have either resorted to past practice and effectively bought Hynix under state control by letting the banks take over, or it could have pushed it into bankruptcy and prompted a new domestic liquidity crisis.
As the head of one rival US investment bank in Seoul summarises, "We should all be positive about this deal, because the Korean banking system would have suffered a huge crisis had it failed. There just wouldn't have been the capacity to provision for the losses."
For investors, the implicit support of the Korean government is likely to have been one of the chief selling points of the deal, even though there were no formal guarantees. And the man charged with selling that story, is also the one credited with much of the ensuing success.
"CS Park is one of the most impressive men I have ever come across in my 10 years here," the Seoul-based banker continues. "He is a big picture person who knows how to convey both the good and bad news to investors. He delivers a message that makes sense and when he has to lace it with bad news, he always makes sure that he has a solution on hand as well."
Syndicate bankers have also praised the lead's handling of the transaction. Says one banker, "The deal has been professionally run in difficult circumstances. In many ways, Salomon was extremely fortunate that there weren't any major market disruptions during the marketing process. But nevertheless, they still managed to keep the propaganda coming and a lot of the false information at bay."
With gross fees totaling 3.95%, it was, however, hardly surprising that co-leads Deutsche Bank, SG Cowen, ING Barings, Nomura and LG Securities were unusually charitable. Indeed, Salomon was generous to the syndicate by capping itself at 70% of the 2.37% selling concession. In addition, there was also a 1.185%management and underwriting fee and a praecipium of 0.395%.
At launch after Friday's W4,100 close, some 104.165 million GDR units were priced at $12, a 24.5% discount to spot and at the bottom of a W3,100 to W3,500 indicative range. One GDR equals five shares and there is also a greenshoe of 15.624 million GDR's representing 15% of the total offering.
With international books said to have closed 1.5 times oversubscribed and local books two times oversubscribed, the GDR was split between a 90% allocation to international investors and 10% to local investors. It is reported that there were a couple of jumbo anchor orders from the US and around a dozen large orders securing what is said to have been a mixed book.
As one non-lead official comments, "With a deal like this, there was always going to be a full spread of investors from super tier 1 accounts down to the hedge funds. It was one of those deals that investors either loved or loathed."
A second banker adds, "A lot of the big Korean investors were certainly absent and there were endless numbers more that had absolutely no interest in a DRAM company full stop. From the outset it was never clear that there would have been enough demand for a company like this in a sector like this at a time like this. As it was, the company was able to secure pockets of money from the dedicated Korean funds, regional funds and some of the tech funds. We saw a few super tier 1 accounts, quite a few tier 2 accounts and a lot of hedge funds."
Bankers further report a geographical split: 50% US, 25% Asia and 25% Europe. A total of 520 million new shares have been issued pre-shoe, bringing the company's total up to 1.013 billion. Should a W991 billion convertible issued to a group of 17 creditor banks as part of the debt restructuring also be exercised, the group will have effected a 100% re-capitalization.
At present, the 19.2% equity stake held by Hyundai group companies has been diluted to just under 10% and placed into a Korea Exchange Bank account with the intention of being sold down. Because Hynix has been disaffiliated from its former owner, the deal's precise pricing would, therefore, have been of little concern to the new management.
With permission to price below the stock's W5,000 par value and having set a floor of W2,961, the lead simply had to make sure that it bought the deal above the latter level. Yet in mid April, when the transaction was first being prepared for launch, the stock hit its year-to-date low of W2,420 and even at the end of the month, was only just trading above W3,000.
At this point, it was still far from obvious and indeed, most observers thought it unlikely, that investors would buy into a transaction offering only a slim discount to spot. As one observer says, "The liquidity of the Korean market would have posed a big problem for the lead. Hynix can easily trade volume of up to $400 million a day. Salomon would have been in no position to exert any control over the stock. It could easily have spent $100 million and still watch it trade the day limit up or down."
As it was, local investors, convinced that a successful deal would bring foreign investors back, pushed the local price up above the W4,000 mark in the ensuing weeks prior to the deal's pricing. And even on the day of pricing, when most observers thought the stock would trade limit down to meet the lower indicative range, it stayed up above W4,000. To many observers, this strong local interest was one of the most surprising aspects of the transaction.
"I was really surprised by how well the underlying held up," reports one syndicate banker. "Retail investors just didn't let it go even when there was a clear arbitrage right at the very end."
For institutional investors, the key consideration was whether the company had a viable future post re-capitalization and would refrain from making further dilutive cash calls. In the face of plummeting DRAM prices, bankers say it was particularly important to underscore the company's financial soundness even in a worse case scenario.
"Every assumption was stress tested on the basis of an average selling price for 64Mb DRAM of $2 from here to perpetuity," comments one expert. "A lot of people have highlighted that low DRAM prices means no cash to build 12 inch fabs, but under this scenario, no-one in the industry would be upgrading to 12 inch.
"The average selling price in May was $2.40," he continues, "and in June it’s expected to hit a low of $2.20. Salomon has forecasted prices to start rising in the third quarter and the fact is that every $1 increase in price adds $1 billion to the bottom line."
A second major concern surrounded the company's capex retrenchment in an industry that requires huge cash outlays to stay technologically innovative and efficient. "One of the things that surprised investors most was the fact that Hynix is the first in its sector to have a commercially available 0.13-micron product," a banker notes.
In its research report, Salomon also states that by the end of the first half, Hynix should have moved about 70% of production to 0.18-micron or below, compared with an estimated 75% for Samsung and 90% for Micron. According to the report, the company is only one quarter behind Samsung and intends to further maximise cost savings by diversifying away from pure DRAM production.
"We estimate that the proportion of non-DRAM revenue will increase to about 46% of sales in 2002 from 18% in 2000," the report states. "By allocating older DRAM fabs to non-DRAM production, the company will be able to lengthen the life of its fabs and amortize equipment costs over a longer period, thereby reducing overall costs."
Bankers further add that the assumptions behind the re-capitalization take no account of potential asset sales, where the company has made some progress in recent weeks and no account of further reductions in the cost of the company's debt.
However, by the third quarter of 2002, when the next major redemptions fall due, Salomon does say that it believes the company will have paid off up to one third of its overall debt and achieved a debt to EBITDA ratio of 1.4 times.
The completion of the offering means that creditors will now re-schedule long-term debt amounting to W1.9 trillion and maintain availability of short-term trade financing of W2.8 trillion for up to two years. Of the company's W9.553 overall debt, the maturity schedule has been stretched out so that: W2.7 trillion falls due in 2001; W2.655 trillion in 2002; W1.034 trillion in 2003; W1.65 trillion in 2004 and W1.454 trillion in 2005.
Any excess cash from an upturn in DRAM prices or asset sales may be used to call the potentially dilutive W991 convertible issued to creditor banks. Under the terms of the offering, which pre-refunds debt maturing in the first half of this year and next, the four year bullet deal has an issue price of par, a coupon of 7.5%, a conversion price of W5,000 and is callable immediately at 115% of par value. It is also subject to a six-month lock up.
For non-syndicate analysts, the company’s major challenge going forwards will be to re-boost cash flow. “We believe that the company’s fully loaded production costs stand at $3.5 per 64Mb DRAM, so Hynix is not making money right now,” says one. “There are concerns about what will happen if DRAM prices continue to stay at low levels. It’s not enough to restructure the balance sheet, the company has got to get its earnings going as well.”
On the more immediate horizon, many will be watching to see how the stock performs this week and whether the company will be able to exercise the $187.5 million shoe as it has indicated it would like. “It will be interesting to see watch the behaviour of those funds that turned the offering down,” one banker concludes. “Now that the deal has defied the odds and been completed, it’s possible that a number will start to picking up stock in the secondary market.”
