Hynix-ST: New friends

Hynix-ST Semiconductor, a joint venture between Korea's Hynix Semiconductor and Geneva-based STMicroelectronics, is developing a semiconductor chip manufacturing plant in Wuxi, in China's Jiangsu Province, to take advantage of hospitable labour conditions. The $2 billion project is backed with a $1 billion limited recourse financing. South Korea's Hynix owns 67% of the project company, while STMicroelectronics owns the remainder.

Rather than relying on their own relationship lenders, which are understood to have insisted on guarantees from the two equity partners in order to bank the project, Hynix and ST approached Chinese banks with a request for funding.

Industrial & Commercial Bank of China (ICBC), China's largest bank, won the arranger mandate, with China Development Bank (CDB) and Agricultural Bank of China joining as mandated lead arrangers shortly afterwards.

The $1 billion debt package consists of around $750 million in senior term loans, and $250 million of junior debt. The senior loan is further split between renminbi and US dollar tranches, with the majority of the debt denominated in dollars.

After launching the deal in October 2005, syndication was finally completed and documentation signed on 11 August 2006. Financial close took place on 26 October.

Joining ICBC, CDB and Agricultural Bank on the $750 million facility were a total of 17 financial institutions. The list of lenders includes both Chinese and international banks, and the need to translate each and every document presented a significant challenge to the project participants' legal teams.

The security agreement was a particular sticking point. Under the terms of the deal, lenders will have no direct recourse to the two sponsors. However, Hynix and ST have agreed to purchase certain products from the joint venture, although these offtake agreements are not included in the security arrangement. Instead, the lenders had to become comfortable with the take-or-pay arrangements, the intra-company relationships and the market for memory devices that will use the joint venture's output.

The Wuxi facility will manufacture both NAND Flash and DRAM memory chips, which are used in digital consumer electronics from computers to mobile phones. Hynix is already the biggest supplier of DRAM memory to the expanding Chinese market, with an estimated market share of 47%.

China has long been a fertile land for electronics manufacturing. Benefiting from cheap labour costs, chip suppliers have moved to follow their upstream product and design manufacturers, which have been attracted by the tax, loan and land incentives put up by the Chinese Government.

Coupling their possession of cutting-edge technology and a potential multi-billion dollar investment meant the sponsors were courted by a number of countries, as well as the various provinces within China. The sponsors settled on the Wuxi Export Processing Zone, a special administrative area established by the Jiangsu government to stimulate foreign investment.

However, the regulations relating to security registration within the zone varied from the central published Chinese law, resulting in lengthy workaround documentation. Notably, within the province a specific secured amount of a loan must be assigned to each creditor and other interested parties, rather than the usual order of priorities among competing creditors starting with the most senior.

More pressingly, the local mortgage registration authority did not recognize the security agent bank, acting on behalf of the syndicate, as an agent. However, intercreditor agreements and a proceeds application waterfall procedure ensured that security was shared as under a typical project financing. Lenders will have security over all the assets of the joint venture, including the borrower's plant and equipment.

When ICBC announced the deal a year ago, the senior debt was split between a $660 million tranche priced at 150bp over Libor and an Rmb830 million ($100 million) tranche priced at the prevailing rate set by the People's Bank of China (PBOC).

In an effort to control the rate of lending by its asset-rich banks, China's banking regulator dictates that loans denominated in renminbi must be priced according to the rate set by the PBOC. Banks are allowed to offer discounts of no more than 10% to the PBOC rate to creditworthy clients, and China has been increasing the benchmark rate this year to cool investment in its growing economy.

With the five-year rate now over 6%, international banks – which have a much lower cost of capital – are increasingly looking to book Chinese assets, and it is little surprise that banks with strong ambitions in China have also committed to the deal. These same restrictions, however, limit the ability of foreign lenders to compete on price, further hampering their efforts to lead project financings in China.

Hynix-ST's financing route suggests that even this source of business for international banks is becoming scarce. Just as the Japanese banks began leading deals 10 to 15 years ago, Chinese banks leading project financings will be a growing trend.

Hynix-ST Semiconductor

Status: Financial close 26 October 2006
Size: $2 billion
Location: Wuxi, China
Description: Financing for the construction of a $2.03 billion memory wafer fabrication plant.
Sponsors: Hynix Semiconductor (67%); STMicroelectronics (33%)
Debt: $1 billion ($750 million senior and $250 million junior facilities)
Lead arrangers: ICBC, China Development Bank, Agricultural Bank of China
Participants: ABN Amro, Banca Nazionale del Lavoro, Bank of China, China Construction Bank, China Minsheng Banking Corp, China Merchants Bank, China Everbright Bank, Chinese Mercantile Bank, Citic Industrial Bank, Citigroup, Credit Suisse, Deutsche Bank, Hana Bank, Industrial Bank, Korea Exchange Bank, Merrill Lynch, Shenzhen Development Bank
Junior debt: DBS Bank
Legal counsel: Milbank (Hynix and Hynix-ST); Gide Loyrette Nouel (ST and junior lender); LLinks Law Offices; Jiangsu FD Yongheng (senior lenders)
Accountant to the borrower: Ernst & Young