Bloomberg News

Elpida Files for Protection in Biggest Japanese Bankruptcy for Two Years

February 27, 2012

Elpida Memory Inc. memory chips are displayed in this arranged photograph in Tokyo, Japan, on Thursday, Feb. 2, 2012. Photographer: Tomohiro Ohsumi/Bloomberg

Elpida Memory Inc. memory chips are displayed in this arranged photograph in Tokyo, Japan, on Thursday, Feb. 2, 2012. Photographer: Tomohiro Ohsumi/Bloomberg

Elpida (6665) Memory Inc., the last Japanese maker of computer-memory chips, filed for the nation’s biggest bankruptcy in two years after semiconductor prices plunged and it failed to win a second government bailout.

Elpida, unprofitable in each of the past five quarters, had liabilities of 448 billion yen ($5.5 billion), according to a filing with Japan’s finance ministry today. The maker of dynamic random access memory, or DRAM, chips will be delisted from the Tokyo Stock Exchange on March 28.

The chipmaker’s troubles, exacerbated by prices falling 85 percent and a stronger yen, may strengthen Taiwanese rivals and Samsung Electronics Co. (005930), whose semiconductor business is profitable after diversifying into products for tablets and smartphones. Japan’s government bailed out the company in 2009, and its decision to let it go bankrupt without further support is surprising, said Yoshihiro Nakatani, a Tokyo-based fund manager at Asahi Life Asset Management Co.

“The impact from the worsening DRAM market and the stronger yen was big on Elpida,” Nakatani said. “The government should have known that this business was risky when it decided to support the company in 2009.”

Bond Defaults

The company’s six bonds defaulted as they came due for redemption today, Elpida said in a statement. The face value of the bonds totals 138 billion yen, according to data compiled by Bloomberg.

Elpida’s 0.7 percent convertible notes due August 2016 fell 0.3 percent to 75 yen per 100 face value today, according to prices from the Tokyo Stock Exchange.

The 2.29 percent bonds due in December were traded at 25 yen and 30 yen after the report, according to BNP Paribas SA. The bond was 75.6 yen on Feb. 24, up from 72.9 the previous day, according to Japan Securities Dealers Association prices.

“The focus in the bond market is the recovery rate,” Hisayoshi Nogawa, Tokyo-based structured credit strategist at the French bank, said in a telephone interview today.

Elpida shares rose 0.6 percent to 334 yen in Tokyo today before the announcement. The shares were suspended for trading after the market closed. The stock has declined 6.7 percent this year after slumping 62 percent last year.

Apple Supplier

The supplier to companies, including Apple Inc. (AAPL), said earlier this month it saw “uncertainty” over remaining in business because it might not have the necessary financing. Elpida hadn’t been able to reach a deal with the trade ministry, the Development Bank of Japan and its main lenders over financing for 92 billion yen in bonds and loans due by April, the Tokyo-based company said Feb. 14.

Bankruptcy for Elpida would help Taiwanese rivals such as Nanya Technology Corp. (2408), according to Andy Wei, who helps manage $80 billion at Eastspring Investments, the Asia asset management unit for Prudential Plc.

“In the short term, this may be positive news for Taiwan DRAM companies as there would be a supply shortage,” Wei said. “This will be good for the industry in the long term if the restructuring or takeover of Elpida means better control of capacity.”

Elpida’s bankruptcy would be the nation’s biggest since Japan Airlines Corp. (9205) sought protection in January 2010 with 2.32 trillion yen in liabilities, according to data from Tokyo Shoko Research. Elpida employed 5,898 people as of March 31, according to data compiled by Bloomberg.

DRAM Prices

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 trouble indicates the difficulty Japanese companies have in competing with South Korea’s 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,” Elpida Chief Executive Officer Yukio Sakamoto said last year.

DRAM prices plunged to a record low last year after PC shipments missed analyst forecasts and sales of Apple’s iPad surged. The price of the benchmark DDR3 2-gigabit DRAM declined to a record 71 cents in November, compared with $4.85 on Sept. 1, 2010, amid slowing personal-computer sales, according to DRAMeXchange, Asia’s biggest spot market for the chips.

Samsung, Hynix

The U.S. personal-computer market declined for the first time in a decade last year as consumers bought more smartphones and tablets, which use 75 percent fewer of the chips in a typical laptop.

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.

Samsung boosted its profits by producing specialty chips for smartphones, tablet computers and servers. Elpida, Hynix Semiconductor Inc. (000660) and other makers of DRAM chips lost a combined $14 billion in the past three years, according to Bloomberg calculations.

The DRAM (DRAM84) chip industry may be pushed into an oligopoly by an Elpida failure, Taipei-based DRAMeXchange said in a statement Feb. 15. Oligopoly is a system in which a small number of companies control the total market supply of a specific product. In an oligopoly, price competition is essentially nonexistent.

NEC, Hitachi

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

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.

The company’s cash and savings fell to about 50 billion yen to 60 billion yen as of Feb. 2, from 97.4 billion yen in December, Sakamoto said.

The company faced 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.

Elpida was formed through the 1999 merger of NEC Corp. (6701)’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.

To contact the reporter on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net

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


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