1st Silicon Malaysia has launched a $325 million issue, as part of its ongoing funding program via arranger Nomura. It will be the first bond issue from Malaysia to achieve an investment grade rating without support from the federal government, and the first time a silicon semi-conductor company has used the fixed income market in such a way. Usually semi-conductor companies finance themselves with equity or high-yield debt.

Special purpose vehicle 1st Silicon Labuan Inc. will sell $325 million floating-rate notes and pass the proceeds to the borrower, 1st Silicon (Malaysia). This is the second part of the financing - last year Nomura arranged a $180 million syndicated loan for the company. The funds from this deal will pay back the loan and be used for general corporate purposes.

The borrower is a silicon wafer-processing foundry, and supplies manufacturers of electronic products mainly in the communications and consumer electronic sectors. The borrower will grant security over its assets by means of a first, floating and fixed charge. The assets include land, buildings, equipment, licences, intellectual property rights, receivables bank accounts and the equity of the borrower.

The loan will be supported by an unconditional guarantee from the Sarawak Economic Development Corp. (SEDC), and a letter from the state government of Sarawak. The letter is not a guarantee, but is a legally binding obligation on the state. SEDC owns 48% of 1st Silicon Malaysia, and the Sarawak Enterprise Corp Bhd., which is majority owned by the government of Sarawak, also owns 48% of 1st Silicon Malaysia. M&W Zander, the foundry construction company, owns 4% of the borrower.

"The deal uses a secured structure that is very similar to U.K. issues," said the Nomura official. "The state backing gets it up to investment grade - a pure securitization would not get such a high rating."

Standard & Poor's has assigned the deal a preliminary rating of BBB. The borrower's stand alone credit quality is much lower than this, because 1st Silicon only became operational in September 2000, and also because the semi-conductor industry is volatile and competitive. 1st Silicon is generating minimal operating cash flow and has the ability to produce 5,000 wafers a month. It hopes to increase production capacity to 20,000 wafers a month by mid 2002 and 30,000 wafers by the end of 2002.

"The semi-conductor industry has experienced a severe downturn, but it has now hit rock bottom and should get better towards the end of this year," said the Nomura official. "When 1st Silicon ramps up its production it should meet this new period of growth. The company business plan should have no problem paying back its debt without the state."

Nomura has started to roadshow the issue which should price around June 11. "The paper will be predominantly sold in Asia but we are also hoping to see reasonable participation from European banks out of their Hong Kong offices," commented the Nomura official. "The deal has quite a story in terms of the company and sector, and we want to give investors three or four weeks before we price it."

And he is confident that there will be more issuance from Malaysia. "Malaysia has a very similar legal system to the U.K. For example, the bankruptcy laws are similar - the trustee can take control of the company. Malaysia is the first jurisdiction outside the U.K. to use a U.K. style securitization."

He continues: "Malaysia is a very stable country and rated BBB/Baa2. It is one of the best places in Asia to do a securitisation, and Nomura is looking at a number of other securitisation proposals."

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