On June 12, 2009, MagnaChip Semiconductor (“MagnaChip”), filed a Chapter 11 Petition for Bankruptcy in the United States Bankruptcy Court for the District of Delaware.  As reflected in MagnaChip’s Declaration in Support of First Day Motions (the “Declaration”), MagnaChip manufactures and sells analog and mixed-signal semiconductor products for consumer electronics.  MagnaChip’s conductors are used in products ranging from computer notebooks to cell phones and flat screen televisions.

This post will look at MagnaChip’s business, including its revenue, debt and assets.  Further, the post will provide a brief explanation as to why MagnaChip filed for bankruptcy and what it hopes to accomplish while in bankruptcy.

Debtor’s Financials

According to its Declaration, MagnaChip’s business consists of three components:  displays, power solutions and semiconductor manufacturing.  The largest part of its business, displays, provides the panel displays used in phones, televisions and other computer divisions.  The displays division accounts for almost half of MagnaChip’s revenue, coming it at $304 million in 2008.  After displays, MagnaChip’s second largest division is semiconductor manufacturing.  Under this division, MagnaChip sells and manufactures wafers designed and used by other semiconductor companies.  Manufacturing generated almost 45% of MagnaChip’s revenue in 2008, totaling $287 million.  Finally, MagnaChip’s power solutions business manufactures transistors, switches and converters used in other consumer electronics.  MagnaChip’s power solutions division generated $5.4 million in 2008.

Going into bankruptcy, MagnaChip reported total assets of $425 million against debt of $1.04 billion.  The company reported net sales in 2008 in excess of $600 million and losses of $387 million.  MagnaChip’s pre-petition debt includes secured debt and unsecured notes totaling $845 million.  Further, the company owes $95 million under a credit agreement from December 2004.

Events Leading to Bankruptcy

Declining demand for consumer electronics, including televisions and cell phones, led to a steep drop in MagnaChip’s 2008 revenues.  In response, the company sought to obtain additional cash through debt and equity, however, the recession’s expansion into the equity markets prevented MagnaChip from accessing additional funding.  Towards the end of 2008, the company sought financing to enter into a pre-packaged bankruptcy, however, those efforts were also unsuccessful.

The Bankruptcy Sale

MagnaChip began marketing its assets in December 2008.  As part of the marketing process, the company reports that it approached 45 potential buyers who might be interested in its assets.  According to its Declaration, MagnaChip selected a Korean limited partnership, KTB 2007 Private Equity Fund, as the entity that “provided the best opportunity to maximize the return on the sale of the MagnaChip Entities’ assets.”  On June 11th, KTB and MagnaChip entered into a business transfer agreement wherein the buyers intend to purchase MagnaChip for $80 million.

Conclusion:  MagnaChip’s Objectives in Bankruptcy

MagnaChip intends to sell its assets to KTB pursuant to a “Joint Chapter 11 Plan of Liquidation”.  The company plans to file its plan of liquidation on June 29th.  From the information contained in the Declaration, it appears some of MagnaChip’s secured lenders support the sale to KTB.  According to page 15 of MagnaChip’s Declaration, “the Debtors, along with the First Lien Lenders, will be co-proponents of the Plan.”

This bankruptcy proceeding is before the Honorable Peter J. Walsh, former Chief Judge of the Delaware Bankruptcy Court.