The bond, which was launched on August 20, replaces earlier plans for an international CB and will be used to cover an earlier $470.8 million Hynix CB that becomes puttable on September 29 and is trading deeply out of the money. Shinyoung Securities is the lead manager and Korea Development Bank is joint bookrunner for the domestic CB, which sources say will also be offered to international investors.
That the conversion premium would be 30% was announced at launch, but the fact that the reference price would be equal to ThursdayÆs closing price didnÆt become clear until late last week and was a direct result of the 18.3% drop in the share price over the previous two weeks. The company told potential investors that the reference price would be based on the lowest of ThursdayÆs closing price; the closing price on August 19 (the day before the board finalised the details); and a combination of the volume-weighted average closing price over the month and week before August 19 as well as the August 19 close.
And after the recent sharp sell-off, ThursdayÆs closing price was by far the lowest. On August 19, Hynix closed at W22,400 and on July 18 it finished at W22,650. This means investors will get a good deal with a conversion price that is equal to where the stock traded as recently as July 3. Part of the selling may be the result of short-selling by potential buyers of the CB since it has been known for some time that Hynix wanted to issue a new CB to re-finance the outstanding one. However, the 14% drop since August 19 suggests there has also been some more speculative selling or even targeted offloading of the stock with the aim of pushing down the reference price. The share price gained 1% to W19,400 on Friday after the reference price had been determined.
The low conversion price is likely to result in even more chatter in the market about the re-financing exercise, which has been the subject of much confusion over the past month. Among the key talking points has been the fact that Goldman Sachs and Macquarie Securities were initially awarded the mandate for an international CB on what was widely assumed in the market to be a hard underwritten basis. Market sources were also surprised that some banks which had been present on all Hynix equity or equity-linked deals since the first creditor sell-down in 2005 û notably Credit Suisse and Woori Investment & Securities û were not mandated on the latest deal. The pair (together with Deutsche Bank and Merrill Lynch) arranged the first equity sell-down in October 2005, the second sell-down in June 2006 and the five-year CB in September 2006, which is the one due to be put back later this month. They were also involved in a second CB in December 2007 together with Goldman, KDB, Macquarie and Morgan Stanley.
However, after the international CB kept being postponed and Hynix publically came out and said it was looking for alternative financing options, including a short-term bridge loan from its creditor banks, it was obvious that whatever potential commitment Goldman and Macquarie may have made it could not have been to hard underwrite a transaction. Hynix hasnÆt commented on the reasons for the delay, but volatile fixed-income markets and significant downward pressure on CBs in the secondary market have kept new Asian CB issuance at a virtual standstill in recent months.
Sources familiar with the process said already in early August that the two banks were no longer working on the Hynix deal. But other rumours had it that the two banks were still trying to come up with a solution that would suit the issuer and it was only when the domestic CB was launched two weeks ago that it became clear that Hynix had opted for a deal not involving the two international investment banks. Representatives for Goldman and Macquarie declined to comment.
Like most other domestic Korean CBs, this Hynix deal is done on entirely fixed terms, making it a question of take-it or leave-it for investors. The bonds have a five-year maturity, but can be put back to the issuer after three years for a 5.8% yield. They will pay an annual coupon of 3%. They also have an issuer call after three years, but at a higher-than-usual 140% trigger which may be a nod to the low reference price.
The CB comes at a time of negative market sentiment towards the semiconductor sector, which has seen Hynix share price drop 38% since June 5, but the company said at the time it launched the domestic bond that it expects ôthat the improved investor confidence in its technology leadership in the semiconductor industry and its future growth potential will be successfully reflected in the offeringö.
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