Hyundai Electronics Industries (HEI), the world's largest volume DRAM manufacturer is hoping to raise $500 million in 10-year debt by the end of the year to re-finance some of its short-term borrowings. However, despite the porfolio diversification the likely B/Ba3-rated company might offer, it is regarded as a challenging credit for bookrunner Salomon Smith Barney and joint lead Chase Manhattan.
Commentators divide between those that applaud the company's efforts to term out its debt as a part of a wider de-leveraging strategy and those who regard its international borrowing plans as a sign of desperation reflecting the fact that its domestic bank lines must be full. For the latter, it is also partly a matter of inopportune timing. The semiconductor sector has been increasingly volatile on the back of oversupply concerns, while B+/B2 rated Asia Global Crossing's recent difficulties in the high yield market have re-inforced investors' continuing caution and pricing power.
Analysts estimate that nearly a third of HEIs' W12.5 trillion ($10.8 billion) outstanding debt outstanding as of end FY1999 has come due this year. As one analyst puts it, "The company definitely needs to stream out its liability structure, but overall, it has pursued a determined and successful strategy of deleveraging itself. Excess cash flow from operations has been used to pay down debt rather than expand capex and proceeds from this bond issue will be used to re-finance short-term term debt rather than fuel expansion."
Propelled by the government's determination to reduce corporate gearing levels, Hyundai Electronics managed to bring down its debt to equity levels from 360% at the end of 1998 to 99.4% at the end of 1999, albeit only by issuing new equity through a rights issue and merging with LG Semicon. Over the same period, debt to EBITDA levels also declined from 9.2 times to 4.2 times, while interest coverage ratios improved from 1.6 times to 2.4 times.
"Low interest coverage is one of the main reasons why the company is still in single-B territory," one analyst explains. "But the company's stand-alone financial position has improved significantly this year. EBITDA rose 27.4% to $2.159 billion during the first half of the year and was combined with a roughly $800m reduction in debt."
Virtually all of this reduction was derived from selling treasury stock, with 31.6 million shares divested between June and August, representing 7% of the company. Currently, the company is 22% owned by Hyundai group companies, with foreign institutional investors holding a further 42.2%, domestic retail investors 24.7% and domestic institutions 3.9%.
How investors view HEI within the wider context of the Hyundai group will be one of the key markers of a potential deal's success or failure. And while some analysts state that the group is relatively insulated, with backing by an independent board of directors, others argue that it is still tainted by association. Unlike Hyundai Motors, for example, the company has not disaffiliated itself and recorded a Won374 billion loss in the six months to June because of write-offs relating to problems at Hyundai Investment Trust.
"The Hyundai group has been under the government microscope all year and the truth is that the way the Korean chaebol operate has not really changed," says one Seoul-based banker. "It is all very well the government taking an aggressive stance with banking sector NPL's, but what difference will this make in the long run if underlying problems from corporate cross-ownership and inflated debt levels are still there?"
Hyundai Motor, which has similarly mandated JP Morgan for a $500 million transaction, has also decided to hold off until next year because it is said to be unhappy with its current B+/Ba3 credit rating and potential pricing levels around the 300bp to 400bp area for an intermediate term deal.
Local commentators add that the company believes it is only speculation about its potential acquisition of Daewoo Motors, which is holding the rating down. "Once the agencies see that Hyundai Motors won't take over Daewoo Motors, then we might see an upgrade from Moody's as well as Standard & Poor's, which still maintains a one notch lower differential," one comments.
For Hyundai Electronics, there are a number of pricing benchmarks, including two outstanding transactions by its American subsidiary Hyundai Semiconductor. Chase led two Yankee bonds for the company to finance a $1.4 billion semi-conductor plant in Oregon back in 1997, raising: $200m in May 2004 debt and $200m in May 2007 debt. The former is currently trading at about 560bp over Treasuries to yield 11.46% and the latter 606bp over Treasuries to yield 11.88%.
To raise 10 year funds, the company would have to pay at least 650bp over including a new issue premium, although some analysts argue that it might be able to come inside Merrill Lynch's US single-B index, currently averaging 676bp over. "On a relative basis, Asian credits are trading tight to the US and now is as good a time as any to issue," says one analyst.
Others believe that Asia Global Crossing (AGC) presents a more realistic comparison. The B+/B2 rated telecoms group raised $408 million in 10 year debt late last week on an issue price of 97.99 and launch spread of 793bp over Treasuries to yield 13.75%. However, while pricing well outside indicative levels highlighted investor selectivity in a difficult market environment, the two deals are very different. Many of AGC's problems, for example, stemmed from the fact that it is a wireless company and one whose short operating history and build out stage of development means that current cash flows are unable to service debt and capex requirements.
Much would also depend on how investors view Hyundai relative to the outstanding pool of Korean subordinated debt, which has dominated issuance so far this year. Backed by the same B/Ba3 rating, Hanvit Bank's 2005 bond is, for example, bid at 633bp over, equating to a yield of 12.19%.
"The problem is that investors view Korean sub debt as a high yield play on the Republic and prices tighten every time there is some positive momentum behind the sovereign credit," says one banker. "This will not be the case with a pure corporate credit and given a choice between the two at similar spread levels, it is pretty obvious that investors would opt for the sovereign play."
Nevertheless, some observers believe that if the company can do a good enough job selling itself to investors, it not only stands to bring down secondary spreads, but may be able to achieve a higher credit rating particularly from Standard & Poor's, which maintains a two notch differential to Moody's. Indeed, some houses have been arguing all year that investors who missed a strong rally in Samsung Electronic bonds last year, should look at Hyundai Electronics this year.
Rated BBB-/Baa3, Samsung's benchmark May 2003 bond is currently yielding about 8.14% on a spread of about 215bp over Treasuries, some 350bp inside of where Hyundai's 2004 bond is currently bid. As one analyst concludes, "Hyundai Electronics is doing all the things that Samsung set out to do, though on a smaller scale. The company is in a much stronger position on a stand-alone basis than it was a year ago and now what it needs to do is convince investors that it will continue to move in this direction and most importantly, will not be required to prop up weaker members of the Hyundai group."
