ProMOS says 70% of CB holders support tender

With three days to go before the end of its convertible bond buyback tender, ProMOS Technologies said yesterday that 70% of the bondholders have indicated their support for the offer. While still short of the required acceptance rate of 79%, it is close enough to suggest a real possibility that the deal will go through -- especially since sources say there are verbal indications that some tender instructions submitted in recent days haven't yet been officially recorded.

To help the offer along, ProMOS has extended the deadline for getting the early tender premium until 2pm London time on March 21, which is also the time when the entire offer expires. The Taiwan-based memory-chip maker had already extended the early tender deadline once, from March 2 to March 17.

Under the original terms of the offer, bondholders who tender their CBs by the early deadline will receive a premium of 10 cents for every dollar of principal they tender, on top of the base offer, for a total of 20 cents.

ProMOS is offering, through Citi, to buy back the entire $335.615 million that remains outstanding of 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 earlier said that 97.4% of the CB was put back. Since the bonds were puttable at par, this would have required an outlay of $326.9 million -- money that the cash-strapped and loss-making company didn't have and had been unable to raise despite exploring a series of options, including the sale of manufacturing equipment, additional secured loans, and new issuance of debt, equity or convertibles.

What it was able to get was a new NT$3 billion ($83.8 million) syndicated loan facility led by Bank of Taiwan, guaranteed by ProMOS's chairman Min-Liang Chen and secured against company assets with a book value of NT$1.5 billion, which it will use to finance the tender.

However, the loan is solely for the financing of the buyback tender and any drawdown is contingent upon the offer getting accepted by at least 79% of the bondholders.

Consequently, the CB holders have to weigh the 80% haircut they are asked to accept (versus the 100 cents on the dollar that they were entitled to under the put option) against the possibility that they may get next to nothing if the offer fails. At that point the company will be wide open to legal action for breeching its obligations under the put option and could well be forced into bankruptcy.

As of the end of January, the company had an available cash balance of only NT$200 million ($5.8 million) after struggling with a negative cash flow in the second half of last year, making it virtually impossible for it to settle any further claims. ProMOS is under pressure as falling demand for computers led to a 36% decline in its sales volume last year which led to an operating loss of NT$24.5 billion ($705 million) for 2008.

The company did get some respite a couple of weeks ago though, when it 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.

A source also said yesterday that some bondholders who have not accepted the tender offer, or have accepted it for parts of their holdings, have still shown their support by withdrawing their put notices. In addition, banks that are part of the syndicate for the NT$3 billion loan, and which hold a combined 12% of the bonds, have agreed to withdraw their notices if the tender offer succeeds. This reduces the number of bondholders with the ability to ask for the company to be put into liquidation.

It also appears that some CB holders may have waited to accept the offer in the hope that a the plans by the Taiwan government to consolidate some of the country's struggling DRAM memory-chip makers into one company would include help for them to settle their debt -- and thus offer an alternative route out for ProMOS. However, the government has now said that there will be no rescue for individual companies under the plan and any company wishing to join the new Taiwan Memory Company will first have to take care of its immediate liabilities.

ProMOS's share price has come under renewed selling pressure following that news and after the company said on March 3 that only about half of the CBs had been tendered by the initial early deadline. As of Tuesday this week, the shares had lost 36% of their value since the beginning of the month. The shares did bounce 6.3% yesterday, however, before the official announcement that the indicated acceptance rate has climbed to 70%.

In the release, ProMOS said it "continues to communicate with the remaining bondholders to submit their tender instructions in line with the new timing".

The offer includes a success premium of 6.5 cents, which will be paid if the acceptance rate is at least 86%, meaning the maximum payout to the bondholders 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.