Taiwan DRAM Maker Powerchip Faces Further Tests

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Powerchip Semiconductor, formerly the largest DRAM maker in Taiwan, was able to secure agreements with enough holders of a convertible bond that came due at the end of last week to move forward on a new repayment plan, but the company faces further loan repayments soon.

The company on Monday said at least 90 percent of holders of US$158.05 million in bonds agreed to a new deal to pay them $600 in cash for every $1,000 bond, with the remainder paid in shares of company stock. The company also extended the deadline of the offer to this Thursday, June 25 to allow remaining bondholders time to consider the offer.

Despite the agreement, analysts say Powerchip is far from out of the woods. More debt repayments loom for the company, and its cash reserves are dwindling.

Cash payments on the US$158.05 million in convertible bonds will reduce the company's cash position by NT$2 billion (US$60.9 million), leaving it with only NT$500 million, wrote Bruce Lu, an analyst at CLSA Asia Pacific Markets, in a report.

But the company faces payments on another bond of NT$2 billion next month.

Powerchip will have to raise money to pay off that debt, and while it still has assets to sell, it will become less competitive without those assets, Lu says.

"With the DRAM downcycle now into its second year, Powerchip has been forced to sell most of its liquid assets," said Lu. "Remaining assets of value are the company's (factories) and the 43 percent stake in Rexchip. These will be liquidated next as the company's creditors pressure it to meet financial obligations. Given the eroding core, we question the company's ability to compete - even in an improving pricing environment."

Powerchip could not immediately be reached for comment. Rexchip Electronics is a DRAM joint venture between Powerchip and Japan's Elpida Memory.

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.

DRAM prices remain so low that companies still can't make money.

Taiwan's five biggest DRAM makers reported a combined net loss of NT$159.49 billion (US$4.86 billion) last year, more than a four-fold increase over a net loss of NT$36.99 billion in 2007, according to data companies filed to the Taiwan Stock Exchange. Revenue in 2008 totaled NT$179.17 billion, down from NT$255.94 billion.

Powerchip reported net losses totaling NT$57.53 billion last year.

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