Are we close to the exercise of Tower Semiconductor Ltd's (Nasdaq: TSEM; TASE: TSEM) equity equivalent convertible capital notes held by Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI), and a flood of Tower shares on the market? In its financial statements for the second quarter, published last week, Bank Hapoalim recorded Tower's capital notes as an asset available for sale for the first time. Banking sources believe that the two banks will seek to exercise their rights in the coming months.
Bank Hapoalim and Bank Leumi each hold 96.5 million Tower capital notes, which they book at a value of NIS 49 million ($13 million). Tower's share price was $1.41 at the end of June. A full valuation of the capital notes, on the basis of this share price, is $133 million. This means that the two banks are booking the notes at 10% of their value.
The reason that the two banks book the capital notes at such a low value is that converting them into shares would substantially dilute the holdings of Tower's shareholders, and probably lowering the shares' value.
Tower's share capital currently totals 248 million shares, after 84 million shares were added last year through the exercise of convertible securities and an allotment of 46 million shares to Yorkville Advisors LLC of the US, which injected $60 million into the company.
In addition to Bank Hapoalim and Bank Leumi, Israel Corporation (TASE: ILCO) owns 206 million capital notes. If the capital notes are converted, Tower's share capital could increase to 400 million, and the holdings of its shareholders would be diluted by 60%. Such a dilution with no capital injection into Tower is liable to drag down the share price, which is probably why the banks opted to record the capital notes at 10% of their value on June 30.
Converting most of the capital notes would result in Bank Hapoalim and Bank Leumi owning 14.9% of Tower, and increase Israel Corp.'s holding from the current 5.8% to 34% (without taking into account additional shares resulting from the conversion of bonds and warrants).
Since Tower files reports pursuant to GAAP regulations of the US Securities and Exchange Commission (SEC), the conversion of the capital notes into shares requires a prospectus approved by the SEC. Israel Corp. and the two banks would be considered as underwriters, which they do not want. In addition, due to the banks' financial covenants with Tower as debt holders, they may not own more than 2.5% of the company.
Consequently, it seems that Bank Hapoalim and Bank Leumi will seek to sell the capital notes to an external investor, which will list them for trading. The banks made provisions for Tower's debt several years ago, so any recovery of the written off debt will be recognized as a capital gain upon payment.
Tower's share price rose 2.2% at the opening on Nasdaq today to $1.41, giving a market cap of $280 million, after falling 0.5% on the TASE to NIS 5.32.
Published by Globes [online], Israel business news - www.globes-online.com - on September 1, 2010
© Copyright of Globes Publisher Itonut (1983) Ltd. 2010