That a distressed company in a distressed sector should be able to raise such a large sum of money in exceptionally difficult market conditions will represent no mean feat. Observers believe that its ability to do so derives from having successfully convinced investors of the company's inherent viability as to whether or not there is an upturn in the DRAM cycle and more importantly, of the stock's significant upside from current low levels.
Hynix closed trading in Korea yesterday (Thursday) at W4,130, but is likely to come under renewed selling pressure today bringing it in line with the GDR's W3,100 to W3,500 indicative range. In the past two days, the stock has come down over 10% on the back of extremely high turnover. Indeed, throughout the whole roadshow period, observers report trading of up to $400 million a day, or nearly a third of the company's free float.
On its final indicative range, the deal will come at a 15% to 25% discount to yesterday's close, although as a number of equity specialists point out, pricing levels are fairly irrelevant as far as the company is concerned. "This has to be the only deal to have ever come out of Korea where there won't be a tortuous pricing meeting and the company genuinely doesn't care," one observer comments.
A second adds, "What's important in a re-capitalization is that the deal gets done and the company gets the money it wants, not the price at which it does so."
For this reason the number of shares to be issued is dependent on the amount raised, not the other way round as would be the case with a normal straight equity offering. In addition, the company's original controlling shareholder, the Chung family, has already been formally removed and therefore can exert no pressure over the dilution of its 19.2% stake to just below 10%.
Because Hynix is keen to raise the entire amount possible and under Korean law only has a three-day window to exercise the $187 million greenshoe, rather than the standard 30 days elsewhere, it also seems highly likely the offering will be priced to rise in immediate secondary market trading.
Books in London and New York were shut after both centres’ respective 5pm closes, with international investors set to be allocated 90% of the entire deal and domestic investors 10%. Following a decision to cancel a $350 million high yield offering, the GDR offering has been raised from $800 million to $1.15 billion, or $1.25 billion after the inclusion of a $100 million strategic stake by Texas Instruments.
Most bankers have applauded the decision to withdraw the 10-year high yield deal since an increase in the equity component will be net cash positive and save the company $50 million a year in interest expense. Proceeds from the debt deal were to have been used to re-pay short-term debt and extend the company's maturity profile, while proceeds from the equity deal, alongside free cash flow, were to be used to fund W1 trillion in capex.
The company has only failed in being able to extend its maturity profile, although bankers argue that should the DRAM cycle turn and the company's outstanding debt continues to tighten, it will be in a far better position to establish a new benchmark for itself later in the year.
At issue was the fact that both the company and its prospective investors baulked at the idea of a 14% to 15% yield for a 10-year debt. Given that Hynix had two outstanding benchmarks trading at far wider levels, it was always going to be hard to persuade many accounts to bite -- especially when the company was not proposing to offer any sweeteners such as warrants -- and the government would not backstop the deal with a guarantee.
"This was never a debt deal and it was the wrong time to approach the market," says one high-yield expert. "Debt investors didn't feel that 14% upside was adequate compensation for a company on the verge of bankruptcy. For equity investors, on the other hand, the potential upside is enormous should DRAM prices re-bound."
Unsurprisingly, news of the B-/B3-rated debt issue's demise led to a bounce in the two outstanding deals, with the 8.25% 2004 issue increasing by about 10 points to a bid/offer price of 81%/85% and the 8.625% 2007 to 71%/76%.
For lead bankers, the loss of the debt issue is unlikely to have caused much concern either, since the equity component pays higher fees and has always been the core focus of the overall deal. Some observers further conclude that the debt deal was only bolted on at the end because the lead was worried a $1 billion plus equity offering would have proved too ambitious in an environment where DRAM prices were sliding to a low of $1.20.