Taiwan DRAM Maker Powerchip Faces Crunch Time on Bond Issue

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Powerchip Semiconductor, formerly the largest DRAM maker in Taiwan, hopes to finalize a new agreement with holders of a convertible bond that comes due at the end of this week, or the company may face legal action by its creditors.

Powerchip has offered holders of the US$158.05 million debt a new deal to pay them $600 in cash for every $1000 bond, with the remainder paid in shares of company stock.

At least 90 percent of bondholders have to agree to the new terms by this Friday in order for the deal to go through, according to terms of the invitation memorandum reviewed by IDG News Service.

Failure to seal a deal this week could force the company to sell assets it would otherwise prefer to keep and could lead to lawsuits by bondholders, but it will likely not push the company into bankruptcy, analysts say.

Eric Tang, spokesman for Powerchip, declined to comment.

Taiwan's DRAM makers have faced tough times amid the global recession due to slumping demand for their chips, which are mainly used in computers. Over investment in new factories a few years ago caused a chip glut, leading to falling DRAM prices and mounting losses for producers. Most Taiwanese DRAM makers have reported continuous losses since the middle of 2007.

The troubles prompted the Taiwanese government to put in motion plans to aid them, including working with banks to postpone loan repayments and forming a new company, Taiwan Memory Company (TMC) to take the lead in restructuring its DRAM industry.

So far, TMC has not aided a single Taiwanese DRAM maker. Government officials said TMC would announce a new business plan as early as next week, but a TMC representative said that there will be no announcement so soon.

Meantime, Taiwan's DRAM makers continue to face debt repayments and DRAM prices so low they still can't make money.

For all of last year, Taiwan's five big DRAM makers reported a combined net loss of NT$159.49 billion (US$4.86 billion), more than a four-fold increase over a net loss of NT$36.99 billion in 2007. Revenue in 2008 totaled NT$179.17 billion, down from NT$255.94 billion.

Powerchip contributed NT$57.53 billion of that loss, according to financial information the company filed to the Taiwan Stock Exchange. In the first quarter of this year, the company reported another NT$6.29 billion loss on slumping revenue of NT$3.92 billion. Last year, Powerchip posted a net loss of NT$9.74 billion on revenue of NT$15.40 billion in the first quarter.

Revenues have fallen as the company cuts back on production to preserve cash.

Powerchip's cash position stood at NT$2.5 billion as of the end of May, according to the bond holder memorandum.

Another hurdle the company faces is a further extension to the loans the government helped Powerchip postpone.

The company won approval in April by the majority of its lending banks to postpone repayment of debt by six months. "In the event that these banks do not renew such extension or the company is unable to fulfill its repayment obligations at the end of the grace period, the company would be in default of those obligations," Powerchip said in the memorandum.

Powerchip's total debt stood at NT$130.7 billion at the middle of last year, according to Taiwan's Ministry of Economic Affairs.

Another problem the company faces is keeping up with new technology, according to a report from investment bank Credit Suisse. Manufacturing technology is the name of the game in DRAM, and without money to buy new machinery and upgrade production lines, the company will fall further behind.

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