Bound by bonds: Inside Elpida’s ¥50B CB dilemma

Dec. 15, 2008 – A languishing share price has triggered a clause in Elpida’s convertible bonds (CB) whereby it has to redeem ¥50B (US $550M) of them in the next month, raising concerns over how the company will finance future capital investments, notes the Nikkei daily.

The move centers around ¥50B CBs allocated to Nomura Securities, “what appeared to be a shrewd fundraising scheme,” putting the company on surer footing than its cash-strapped rivals, notes the Nikkei Business Daily — but one that has now proven to have “backfired.” One problem is in the terms with Nomura for the special type of “moving strike convertible bond” that reflects the issuer’s latest stock price, and the brokerage’s right to convert >¥5B worth into common shares every month, which could spike Normura’s equity stake and decimate the value of shares held by existing holders, the paper notes. “We never imagined that our stock would plunge so much,” noted Elpida president Yukio Sakamoto, quoted by the paper; he later apologized directly to shareholders on the company’s Web site.

Another problem is a clause that obligated Elpida to redeem all the bonds if the company’s share price closed below the minimum ¥509 price for 20 straight sessions, which has now occurred (¥420 on Dec. 11, after reaching a peak of ¥508 in late November). Redeeming the bonds eliminates share dilution worries, and removing the uncertainty of this CB move will likely improve the stock. But handing back ¥50B also raises the specter of future funding challenges amid a persistent DRAM supply glut — the bonds were intended to be applied to capital investments for new technologies and facilities in the next fiscal year. Short-term investors who had leveraged the stock volatility for temporary gains will likely lose interest, and the focus will likely turn back to fundamentals — which are lousy not just for Japan’s sole DRAM maker but the whole sector, which makes long-term investors skittish, according to fund managers in the US and Japan cited by the paper.

As a result of the CB redemption, Elpida’s cash-on-hand will sink to an estimated ¥150B (US $1.65B); if DRAM unit prices stay below $1 (where they’ve been for a while), the company will need about ¥10B ($110M) in monthly operating capital, and will need to seek more funding soon, the paper notes.

There are options, though, for Elpida, the paper notes. One is a new issuance by Taiwan’s Rexchip, in which Elpida recently revealed intentions to raise its stake to 52% and make the JV a consolidated subsidiary — in a separate move intended to strengthen the Japanese firm’s borrowing capacity and avoid triggering a separate repayment clause based on net asset devaluation. Elpida’s “do-it-yourself approach may help the company overcome its current funding setback,” the paper notes.

It’s worth noting that Elpida is hardly the only memory firm in this situation; Hynix and Taiwanese chipmakers are even deeper in this type of hole. But both Korea and Taiwan governments are seriously considering if not outright planning rescue efforts for their memory sectors.

But the entire DRAM sector “is now locked in a large-scale game of chicken, in which being the first to flinch means retiring from the market,” the paper notes. “Elpida may find the business environment even tougher if there are changes in favor of rivals.”


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