Friday, January 23, 2009

The First Domino Falls

After failing to secure a 325 million Euro rescue package from the German state of Saxony, Portugal's CGD Bank and parent Infineon, Qimonda today filed for bankruptcy. At the current cash burn, the package would have kept Qimonda afloat for another two quarters. Qimonda plans to continue as an ongoing concern under the auspices of bankruptcy protection, although how it plans to do so is unclear. Suppliers and business partners are likely to ask for cash upfront in any business dealings with the company, In addition, the company will need to make investments in its innovative Buried Wordline (BWL) technology to remain competitive on the technology front. It is estimated that over half a billion dollars will be required for the transition to 46nm BWL.

Now that the first domino has fallen the question is: Who's next? Spansion has delayed interest payments due January 15 on its outstanding 11.25% Senior Notes. The company has a 30-day grace period to rectify the situation and at the same time, has retained Barclays Capital to explore "strategic alternatives" including merger or selling of assets. With the meltdown in electronics demand in Q4/08 and uncertain economic environment, Spansion is going to have a difficult time of closing any "strategic alternatives". It is highly likely the company will file for Chapter 11 before the 30-day grace period is up which would be the 2nd week of February.

Taiwanese DRAM manufacturer ProMOS is another potential domino. With the DRAM prices falling below cash costs, ProMOS cut is fab capacity utilization to low double digit percentage to conserve cash. The company has also resorted to asset sales having sold NT$1.9 billion (US$56.5 million) worth of wafer test equipment to Powertech Technology, NT$580 million (US$17.2 million) 300mm front end wafer fab equipment to TSMC and US$15 million in land to Kingston.

With ProMOS' share price at NT$1.51 prior to the start of the lunar new year, well below the NT$14.7 conversion price, ProMOS faces the prospect of redeeming a $330 million Euro convertible bond due February 14. Having only about NT$5.4 billion cash (US$160 million), ProMOS has applied for a bailout package from the Taiwan government, however the government is promoting industry consolidation and indigenous technology development as the condition for any support making any carte blanche bailout unlikely. An alternative is for creditor banks to swap their ECB holdings to ProMOS shares or to extend the redemption deadline. If these efforts fail, then ProMOS' fate may depend on the rumored Elpida-Powerchip-Rexchip-ProMOS merger. If the consolidation proposal meets the indigenous technology requirements, ProMOS may find a new life under a larger entity. ProMOS will have only two weeks after the lunar new year to find out.

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