ProMOS extends early deadline on CB buyback

ProMOS Technologies said yesterday that it will extend the early tender offer period for its ongoing convertible bond buyback by 10 working days until 2pm London time on March 17 after more than half of the bondholders have indicated that they will support the offer. The original deadline for bondholders wishing to get the early tender premium was on Monday (March 2).

The Taiwan-based memory chip maker is offering to buy back the entire $335.615 million that remains outstanding on a zero-coupon bond due 2012 after it failed to meet its obligations with regard to a put option that took effect on February 14. ProMOS has said that 97.4% of the CB was put back.

The company said it decided on the extension in response to requests from a number of bondholders and added that it is intended "to allow the credit-linked holders, in particular, sufficient time to unwind existing positions and submit the various required tendering instructions". Some bondholders have also argued that they need more time to evaluate the future of the DRAM industry, which is under severe pressure due to a combination of falling demand for computers and excess supply.

The extension should improve the chances for the cash-strapped company to get the 79% acceptance rate it needs for the offering to go through and to avoid a possible bankruptcy. The reason why the company kept the early tender deadline tight to begin with was that it was already technically in default and was worried that some of its creditors or customers may ask for the company to be put into liquidation before the offer could be completed.

The immediate threat of that happening was reduced at the end of last week, however, when ProMOS reached an agreement under the Government Restructuring Program that will result in its syndicate banks granting it a 12-month principal repayment reprieve on existing loans that have already come due or will come due in the near term. The agreement will affect principal repayments of NT$52.2 billion on long-term loans and NT$3.8 billion on short-term loans, and includes the principal repayment of NT$830 million on a term loan from 2005 that the company was unable to pay in December.

And having secured a new NT$3 billion ($83.8 million) syndicated loan facility led by Bank of Taiwan to finance the tender, the company has the funds to pay all the bondholders the full 20 cents on the dollar, which -- in an attempt to get them to accept the offer as quickly as possible -- was previously promised to those who tendered their CBs before March 2.

Under the original terms of the tender, which is being arranged by Citi, ProMOS was to repay the bondholders 10 cents for every dollar of principal they own, plus an early tender premium of 10 cents. There is also a tender success premium of 6.5 cents, which will be paid if the acceptance rate is at least 86%, meaning the maximum payout is 26.5 cents on the dollar. If the acceptance rate is between 82% and 86%, the success premium will be 3 cents per dollar.

While this could mean a slight premium over the 20 cents that is bid for the bonds in the market, the bondholders nevertheless have to accept a significant haircut versus the 100 cents that they were entitled to under the put option.

Still, there is no guarantee that they would receive more if the company was placed into receivership and restructured or liquidated altogether. And yesterday's announcement suggests a large number of bondholders are prepared to cut their losses and back the tender, with more than 50% of them having either indicated that they will accept the offer or withdrawn their put notice. To accept the tender offer, the bondholders first have to withdraw their put notice, so by doing that, they have in effect implied that they will tender.

The company once again stressed that the new NT$3 billion loan is solely for the financing of the buyback tender and any drawdown is contingent upon the success of the offer (an acceptance rate of at least 79%). It is, however, "the largest and best possible financing package available", the company said, adding that it has exhausted all other alternatives.

When it announced the offer on February 20, ProMOS said that if the tender is successful it may undergo an extensive restructuring and consolidation plan in consultation with various industry players and the Taiwan government.

ProMOS is bleeding cash after falling demand for computers led to a 36% decline in its sales volumes last year. It posted an operating loss of NT$24.5 billion ($705 million) for 2008 and had a cash balance of only NT$200 million at the end of January (excluding cash tied up as security for loans).

It is far from the only memory chip maker to be in trouble, however. German-based Qimonda filed for bankruptcy in January and earlier this week US flash memory chip maker Spansion filed for court protection under Chapter 11 as it attempts to restructure $1.5 billion of debts.

The tender offer will remain open until March 21 -- four days after the expiry of the early tender period.