Bloomberg News

Elpida Shares, Bonds Slump After Financing Warning: Tokyo Mover

February 15, 2012

Feb. 15 (Bloomberg) -- Elpida Memory Inc. fell 14 percent in Tokyo trading and its convertible bonds had a record drop after the chipmaker said there is “uncertainty” over its viability because it lacks financing for debt due in April.

Shares declined to 320 yen on the Tokyo Stock Exchange, the biggest drop since September 2009. Elpida’s 0.7 percent August 2016 convertible bonds plunged to 64 yen per 100 face value, to yield 22.7 percent in Tokyo today, according to prices from Barclays Capital.

Elpida hasn’t been able to reach a deal with Japan’s trade ministry, the Development Bank of Japan and its main lenders, the Tokyo-based company said in a statement yesterday. Elpida’s ability to repay 92 billion yen ($1.2 billion) in bonds and loans by April is made more difficult by plunging chip prices. South Korean competitors Samsung Electronics Co. and Hynix Semiconductor Inc. both rose in Seoul trading today.

“The stock will probably remain volatile as the concern over Elpida and its lenders’ agreement lingers,” said Yuichi Ishida, a Tokyo-based analyst at Mizuho Investors Securities Co. who has a “neutral plus” rating on Elpida. “Investors will probably continue to be nervous about those headlines.”

Elpida’s 0.5 percent October 2015 convertible notes slumped to 70 per 100 face value, at 27.4 percent on a yield-to-worst basis, Barclays Capital prices show. Yield-to-worst takes into account the risk that the debt will be redeemed early.

Debt Outstanding

Elpida has the equivalent of $4.16 billion of bonds and loans outstanding, according to data compiled by Bloomberg. Japan Credit Rating Agency, the only risk assessor to grade Elpida, cut its rating on the chipmaker to BBB-, the lowest investment level, from BBB after yesterday’s announcement.

Elpida’s comments reversed a Feb. 2 announcement from the Apple Inc. supplier that it expected to secure financing by March 31.

Japan’s largest maker of dynamic random access memory, the most common chip in computers, needs government backing to stay in business after five straight quarters of losses, analysts said. The Japanese company lost 62 percent of its market value last year, extending a 37 percent slump in 2010.

“Elpida has not made as much progress as initially envisioned in discussions with the relevant parties,” the company said yesterday. “Therefore, material uncertainty about its assumed going concern is found.”

Repayment Deadline

The company’s cash and savings fell to about 50 billion yen to 60 billion yen in cash and savings as of Feb. 2, from 97.4 billion yen in December, Chief Executive Officer Yukio Sakamoto said. Elpida redeemed 30 billion yen in bonds on Jan. 24.

Elpida may be able to collect about 50 billion yen through support from customers, he said Feb. 2. The company faces a deadline to redeem 15 billion yen in bonds on March 22 and repay about 77 billion yen in loans from lenders on April 2, according to its filings.

“The government already helped them in the past, so it’s important for them to exit when the company is still alive,” said Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management Co. in Tokyo. “I think the support will continue.”

Elpida’s slump indicates the difficulty Japanese companies have in competing with Samsung, which had 7.34 trillion won ($6.5 billion) in operating profit from selling chips last year. Chip prices had become as cheap as a “rice ball,” Sakamoto said last year.

Samsung, Hynix

“The chip industry is in trouble,” said Edwin Merner, president of Tokyo-based Atlantis Investment Research, which manages $300 million. “Most commodity-type chip companies are losing money and the business continues to be capital intensive.”

Samsung boosted its profits by producing specialty chips for smartphones, tablet computers and servers. The Suwon, South Korea-based company climbed 5.1 percent today in Seoul trading to 1,135,000 won.

Hynix rose 5.3 percent to 29,000 won, on the Korea Exchange, the highest level since May 31.

Elpida is also discussing advance payments and capital investments with customers, it said last month. The chipmaker’s net loss for the three months ended Dec. 31 was 42.1 billion yen as demand for personal computers slumped and the yen strengthened, it said Feb. 2.

DRAM Losses

The company got 140 billion yen in financial aid and loans from the government and banks in 2009 after falling chip prices caused it to post a record loss.

“Elpida’s future is totally dependent on the government’s decisions,” said Young Park, a Hong Kong-based analyst at Woori Investment & Securities Co.

The company can’t survive on its own, and the Japanese government may be willing to extend support to keep DRAM production within the country, he said. Japanese media have reported that Elpida may tie up with Micron Technology Inc. and Nanya Technology Corp.

Elpida, Hynix and other makers of DRAM chips lost a combined $14 billion in the past three years, according to Bloomberg calculations. That comes after the $37 billion that researcher DRAMeXchange estimates they spent building factories in a bet on continued growth in the industry.

The price of the benchmark DDR3 2-gigabit DRAM, which plunged to a record low of 71 cents in November, fell 61 percent to 88 cents in the past year amid slowing personal-computer sales, according to Taiwan-based Dramexchange, Asia’s biggest spot market for the chips.

Strong Yen

As the faltering global economy and floods in Thailand curb PC production, some DRAM manufacturers may not have enough money to mimic Samsung’s diversification, analysts said.

Elpida was formed through the 1999 merger of NEC Corp.’s and Hitachi Ltd.’s memory businesses. Fujitsu Ltd. abandoned the business that year, and Toshiba Corp. announced its withdrawal in 2001 to focus more on making NAND flash memory chips, which are used in tablet computers and smartphones.

Elpida plans to shift some domestic production to its Rexchip Electronics Corp. unit in Taiwan to reduce its vulnerability to a stronger yen, it said in September. The rising Japanese currency, which climbed to a postwar high of 75.35 against the U.S. dollar on Oct. 31, is eroding Elpida’s repatriated earnings from overseas sales.

Samsung controlled 45 percent of the DRAM market by value in the third quarter, according to Englewood, Colorado-based IHS Inc.’s iSuppli. Hynix held a 22 percent share, followed by Elpida’s 12 percent.

Micron had the same share as Elpida, with $2 million less in revenue, and Nanya had a 3.6 percent share, according to iSuppli.

“Elpida is really struggling and there are no mergers and acquisitions possibilities available,” said Ben Yeh, who rates Nanya “neutral” at KGI Securities Co. in Taipei and doesn’t directly cover Elpida.

“I am confident the Japanese government will help because they have an incentive to do so now that the worst has passed and the industry and prices are picking up.”

--With assistance from Jun Yang in Seoul, Tim Culpan in Taipei, Yuki Yamaguchi, Mariko Yasu and Yusuke Miyazawa in Tokyo. Editors: Anand Krishnamoorthy, Michael Tighe

To contact the reporter on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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