The default on a corporate bond issue by Procomp Informatics Ltd (
The Procomp scandal has also cast doubt on the effectiveness of Taiwanese companies' corporate governance mechanisms, the S&P said in a statement published on its Web site.
"Other than a small number of companies that are subject to international reporting standards, few companies have been active in driving corporate governance forward," said John Bailey, director of S&P's corporate ratings.
On June 14, Procomp, Taiwan's first gallium arsenide epitaxial (GaAs) wafer foundry, filed a restructuring proposal in a local district court, saying it was unable to maintain solvency.
GaAs chips are used in communications devices including mobile phones, satellite communications systems and car navigation systems due to their speedier transmission compared with other chips.
On June 16, the company failed to pay a bond while financial reports showed it had NT$6.3 billion in cash. The default led to a suspension of trading of Procomp shares on June 23 and the detention of its chairwoman Sophie Yeh (
Apart from questions about the company's accounting practices, Procomp's default highlights the opaque way business can sometimes be done in Taiwan, the S&P said.
As the scandal broke out, both government and investors found that Procomp did not have independent directors, while its founding shareholder controlled the board. In addition, the company established no audit committee, according to the international ratings agency.
"Another issue highlighted by the default of Procomp is the risk associated with convertible bonds," Bailey said. "Many companies view convertible bonds as pure equity and underestimate the potential refinancing risk."
Taiwan companies have been issuing convertible bonds to lock in zero-interest funding. Listed companies in Taiwan raised US$10.6 billion through overseas convertible bonds last year and US$3 billion more in the first five months of 2004, S&P said.
Most of these bonds have maturities of five years, with some issued by technology companies that can be redeemed in 12 to 24 months, S&P said. Some Taiwan companies, which are approaching a peak repayment period, may face liquidity problems, the agency added.
Both the government and professional groups are trying to raise the nation's corporate governance standards, but the pace is slow, in view of Taiwan's family companies' resistance to upgrading corporate governance principles, S&P said.
"It should come as no surprise if further reports emerge of Taiwan companies in financial difficulty," Bailey said in the statement.
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