ProMOS tender succeeds after criteria amended

The management of ProMOS Technologies likely breathed a sigh of relief yesterday after the Taiwan memory-chip maker completed the tender offer for its zero-coupon convertible bond due 2012, clearing the first hurdle in its quest to remain an operating company. The acceptance rate squeezed past the 79% minimum after the final deadline was extended by six days to last Friday and the minimum guaranteed payment for those who tendered by then was raised to 25 cents on the dollar from 20 cents.

While this makes ProMOS the first Asian company of size to successfully complete a CB buyback for distressed reasons this year, the company has another NT$19.2 billion ($555 million) of principal payments on outstanding bank loans coming due later this year that it will need to either refinance -- an unlikely option since it requires new capital that will be difficult to raise -- or restructure. In other words, while the company is in better shape today than it was a month ago, ProMOS is by no means out of trouble.

Indeed, the company has earlier indicated that if the tender, which was managed by Citi, was successful it may undergo an extensive restructuring and consolidation plan in consultation with various industry players and the Taiwan government. One possibility is for the company to join recently created Taiwan Memory Corp, which is the government's attempt to consolidate companies within the DRAM industry under one roof to allow them to share technology, among other things. However, the government has publically noted that it has no intention to bailout individual DRAM makers as part of this plan, which suggests ProMOS will need to reduce its debt burden and servicing costs before this becomes a viable option.

ProMOS announced last night that the official tender acceptance rate reached 80.34%, but only because it amended the criteria last week to include not only bondholders who actually tendered their CBs, but those who revoked the put option and agreed to hold the bond to maturity as well. Together with 11.9% of the CBs that are held by banks included in the syndicate that will lend ProMOS the money to pay for the tender, this means that the potential threat of a CB holder taking action because the company failed to honour its obligations under a put option has been removed with regard to 92.2% of the outstanding bonds.

While a 100% acceptance rate was never on the cards, the fact that the company offered an additional success premium if more than 86% of the bonds were tendered suggests that it was initially hoping to leave no more than 2.1% of the bonds in limbo. The lower-than-hoped-for acceptance also means that the company may now have to come up with the cash to redeem at least 20% of the bonds at par when they mature in 2012 -- unless of course the share price recovers and the CB is converted into equity before then. However, when the CB was issued in February 2007 the stock was trading above NT$12 and even with a reset down to an 80% floor since then, the conversion price is still NT$9.88, or 648% above yesterday's close of NT$1.32, making conversion seem like a remote option right now. On the positive side, thanks to the zero coupon, ProMOS will not have to make any interest payments between now and maturity.

The company provided no breakdown yesterday with regard to how much of the 80.34% it is buying back and how much will remain outstanding. Thus it was not clear how much the tender will cost the company. The maximum cost, based on a purely theoretical assumption that all the bonds were tendered- - which was obviously not the case -- will be $67.4 million.

The company has secured a NT$3 billion ($83.8 million) syndicated loan facility, led by Bank of Taiwan, which will be used to finance the tender. The loan can only be used for this purpose, however, meaning ProMOS cannot draw down the remaining funds for use towards what analysts say is a much needed investment in new technology.

The DRAM chip maker was forced to launch the discounted tender for the entire $335.615 million that remained outstanding of the CB after it failed to meet its obligations with regard to a put option that took effect on February 14. Initially, 97.4% of the CB was put back.

Under the original terms of the tender, which was launched on February 20, bondholders who tendered their CBs by the early deadline (initially set for March 2 and subsequently extended twice) would receive a premium of 10 cents for every dollar of principal, on top of the 10 cent base offer. The original terms also included a success premium of 3 cents per dollar if the acceptance rate was between 82% and 86% and a premium of 6.5 cents if it reached at least 86%.

When the extension of the final tender deadline was announced on March 23, the company noted that many of the bondholders had said they intended to accept the offer only if the company paid 25 cents on the dollar, irrespective of whether the acceptance rate reaches the premium thresholds. And since it had enough funds available, partly thanks to the NT dollar/US dollar exchange rate having moved in its favour since the syndicated loan was obtained, the company decided to accommodate those wishes.

A 47% rally in ProMOS's share price over the past week, including a 6.5% gain yesterday, suggests that investors had been expecting the tender to go through based on the amended terms. The CB has not traded since late January when more than 97% of the bonds were prevented from changing hands due to the put notices being filed. At that time they were bid at about 20 cents on the dollar.