A fight has erupted between a group of institutional investors and the owners of Singapore semiconductor company UTAC over a debt swap that will test governance standards in emerging bond markets

November 12, 2013 3:22 am

Singapore debt feud tests emerging bond markets

By Stephen Foley in New York

A fight has erupted between a group of institutional investors and the owners of Singapore semiconductor company UTAC over a debt swap that will test governance standards in emerging bond markets. The investors are clashing with TPG and Affinity Equity Partners, the private equity groups that took UTAC private in a $1.4bn buy-out in 2007, on the eve of the credit crisis.The fight will be watched closely by developed market investors, who have led a charge into emerging market debt this year amid ultra-low interest rates on domestic bonds and in spite of concerns about weaker governance.

The investors claim that UTAC’s parent company, Global A&T Electronics (GATE), diluted their holdings when it elevated more junior debtholders to rank equally with their more senior bonds.

GSO, the debt arm of private equity group Blackstone, is among the blue chip investors and hedge funds seeking to block the controversial refinancing. Others include San Francisco-based hedge fund Farallon Capital.

The make-up of the group could not be established, but holders of the first lien bonds included BlackRock Inc,Fidelity and ING Investment Management, according to Bloomberg data.

Lowenstein Sandler, lawyers for the investor group, said that they represent holders of more than one-quarter of the $625m of original first lien bonds, which were issued in February.

They wrote to UTAC last week claiming the dilution put the first lien bonds into default, setting the clock ticking on a 30-day “cure period”, which will be followed by a lawsuit if a resolution is not reached. The group is asking for the second lien exchange to be reversed or altered.

UTAC said that it had “received a letter from a law firm purporting to represent certain unidentified noteholders and alleging various defaults under the governing indenture”.

“We believe this purported notice of default is invalid, lacks any merit and is instead designed to serve the interests of certain select noteholders unhappy with the company’s recent debt exchange.”

The February first lien bond issue was itself part of a refinancing after UTAC, which stands for United Test & Assembly Center, shelved plans for an initial public offering in 2011.

In September, the parent company exchanged $543m of second lien debt that was due to mature in 2015 for $503m of first lien bonds that will mature in 2019. The holders of the second lien bonds included Affinity, which owned more than one-third of the issue, and RBS.

The exchange resulted in Moody’s downgrading its credit rating on the first lien bonds in October, calling the refinancing “clearly negative” for existing bondholders and “a clear indication of aggressive financial tolerance by GATE’s management and major shareholders, in light of expected weakening of financial performance”.

In a letter to the company last month, Lowenstein Sandler said that, as a result of the exchange, “GATE’s senior leverage increased dramatically [and] our clients’ collateral was destructively diluted”.

TPG declined to comment. Affinity did not respond to an e-mail seeking comment.

While semiconductor testing recovered quickly from the recession thanks to the growth of smartphones and tablet computers, UTAC is in a weaker position than some competitors, according to a report last month by Imperial Capital analyst Edward Mally.