Against the backdrop of tight supply and uncertain geopolitics, his other treasury failsafe is easy access to the financial markets and a strong investment grade credit rating. Arranging the financing for the company’s 2019 €9bn purchase of US rival Cypress Semiconductor proved its worth.
Financing came via a final mix of one third equity and two thirds debt spanning two straight capital raises, a hybrid bond placement, a jumbo euro bond and one US private placement in a strategy carefully choreographed to keep the rating agency (S&P Global) happy, despite the unprecedented size of the deal – half of Infineon’s market cap. “We spent a lot of time with the rating agency upfront, presenting financing scenarios to ensure our target equity debt mix would safeguard the company as investment grade.”
Although the rating slipped from BBB flat to BBB – when the deal closed, it was still investment grade. Since then, S&P has bestowed a positive outlook on the company, indicating a road to a potential return to BBB flat. This has ensured the door was always left open to the right kind of investors at the right price, he says. “If you are sub investment grade you run the risk of markets being closed or unavailable. We have funded ourselves up to 2033.” It also meant the company could access the ECB’s bond buying programme, set up to support investment grade companies with stable funding through the pandemic.
The process also marked another coming of age in today’s volatile and challenging semiconductor market. Prior to the Cypress deal, Infineon didn’t have an established set of core banks providing an RCF. In a quid pro quo, the group of banks advising on the deal committed funding lines in return for the M&A advisory mandate. “They had to chip in and put their money where their mouth was, guaranteeing to underwrite the initial transaction,” he said.
Since then, the company has syndicated out to 20 national and global institutions, initially providing committed financing across a short-term bridge facility as well as term loans out to 2024. Take-out transactions were all allocated competitively. “Normally you have initial underwriters who take the largest piece of cake, then financing is pre-allocated according to ticket sizes in the syndication,” he explains. “Following the syndication, we had all our banks on an equal footing so that whenever a refinancing came up, they could compete equally.” Although the process is more laborious for banks and treasury, it assures Infineon gets “the best service” from “highly motivated banks,” giving them a chance to “prove their worth.”
It’s just the kind of competitive, level playing field that plays to banks’ individual strengths that he wants in the global chip market. And one of the reasons he questions if investing billions in more manufacturing capabilities in Europe to reduce dependency on highly skilled Asian contract manufacturers would ultimately benefit. The EU has earmarked a portion of its €750bn COVID-19 recovery fund to strengthen Europe’s semiconductor design and manufacturing capabilities. Elsewhere Bosch recently received €140m in European subsidies for its new €1bn semiconductor factory. In the US, leading the re-shoring drive, plans to beef up the domestic industry have been enshrined into a new bill “Creating Helpful Incentives to Produce Semiconductors for America Act,” or CHIPS outlining plans to create a US$10bn federal grant, investment tax credits and a variety of research and development funds. Yet Foltin isn’t convinced that getting into a spending race is viable, questioning if the EU can match government incentives elsewhere. “We welcome support for a road map for the European industry, but we need sensible, intermediate steps on route to getting there.” In the meantime, it makes the arguments for free trade even more compelling.
Semiconductors is one industry particularly vulnerable to souring US/China relations. But the flip side of a tougher US stance on China is better US/EU trade terms, an entente recently evident at the G7 gathering in Cornwall. For example, the US and EU have just announced a five-year truce on aircraft subsidies to Airbus and Boeing which has led to billions of tariffs on their respective exports over the last 17 years. The reason, says Robert Silverman, a partner at New York law firm GDLSK which specialises in international trade and customs, reflects the new administration’s effort to work more closely with its key trading partners. It also reflects a united response to the emergence of China’s Commercial Aircraft Corp (Comac), a competitor to the two plane makers.
Elsewhere, he notes a pause in the threat from European countries to impose digital taxes on US tech giants and less talk of reciprocal US threats of duties on European products. “The current administration wants to be on better trade terms with the EU,” he says, adding that duties on steel products into the US from the EU imposed under Section 232 are also likely to be softened.
In contrast, Chinese companies importing into the US remain out in the cold, particularly vulnerable to anti-dumping duties. He estimates around two thirds of all products from China into the US are subject to 301 tariffs which are either 7.5% or 25% (depending on the commodity) and will stay in place for a while yet. “Democrats and Republicans have divergent views on many issues, but everyone wants to be tough on China,” he says. All the while China is forming its own alliances through the BRI and, more recently, via the 2020 extended Regional Comprehensive Economic Partnership, widened to include an additional ten countries but not the US or EU. “This is a sign that points to the potential increase in tensions between the US and China,” warns Gianluca Romeo, Director, Banks, EMEA at Fitch Ratings.
In a ripple effect, Silverman says he notices more companies shifting their supply chain from China to reduce the assessment of duties. “We are seeing some movement to some of the European countries where it is less expensive to manufacture products like Poland or Turkey. But it has to be done the right way to make sure you are not still subject to additional China duties,” he says. “The pandemic hasn’t dimmed the number of US custom audits and penalty cases, and potentially high duty rate items are at the top of the list.”
In another trend, companies are looking more closely at their tariff classifications under harmonised tariff schedules. “Tariff provision ‘A’ might be subject to additional duties, or dumping duties, and tariff provision ‘B’ may not,” he explains. “Companies are taking time to ensure that a product is being classified in the right way.” US Customs is also on the lookout for items where duties have been avoided because of misclassification. He also notes about the possibility of valuation reductions. Most duties in the US are set at a percentage of dutiable value resulting in companies increasingly trying to lower their dutiable value. “If an importer buys from a trading company who then buys from a factory, the factory price is usually lower than the trading company price. In the US, if the transactions are set up the right way, dutiable value can be based on the factory price not the trading company price,” he says, explaining that furniture imports from China are a good example of this process in action. Duty-free up until 2018, they are now subject to a 25% rate. “Furniture importers didn’t care what the customs value was because there was no duty. Now they want to lower the dutiable value – 25% of a smaller number is less duty.”
Mind the gap
Protectionism and its impact on global trade is also one of the culprits behind crimped availability of trade finance. In 2020 a raft of important trade finance banks including ING and Natixis exited or reduced their trade finance offering. And although other players are filling the gap created by their exit, Fitch’s Romeo says demand still exceeds supply. “The free space resulting from banks exiting the market isn’t being absorbed. The consequence is reduced access to trade finance especially for SMEs; large corporates remain a target for trade finance banks.” Although trade finance is low risk and short-term, profits are low making scale important – difficult against the backdrop of dimmed growth, he says. “Protectionism is a major risk for banks with trade finance programmes. It is a main driver for banks deciding to expand their business – or disengage.”
Of course, protectionism isn’t just a consequence of souring US China relations. Witness how labour unions recently complained that Mexico breached USMCA (the free trade agreement between Canada, Mexico and the US that replaced NAFTA) over labour rights in its manufacturing processes. Protectionism also includes sanctions. Russia and Iran, which together account for a large slice of the global population, are both excluded from free trade agreements. Elsewhere, protectionism is a consequence of nationalism. Brexit jettisoned bilateral agreements and has led to new duties and costly customs paperwork for fraught UK companies exporting to Northern Ireland – within their own country. The global and freewheeling semiconductor industry is both particularly vulnerable to protectionism, and because of its strategic importance, in danger of feeling its wrath. Any change to the backdrop of free trade and open boarders that have allowed the industry to flourish would be detrimental. “When you reduce protectionism you have GDP gains, less corruption and improved competition,” concludes Romeo.