- AMD now plans to raise $1.26 billion net of expenses, through the issue of common stock and convertible debt.
- The costs incurred will offset the benefit of debt restructuring in the near term, but the long term impact is positive.
- Here's why AMD has bottomed out for now, at least on the grounds of capital restructuring.
Sunnyvale, California-based Advanced Micro Devices, Inc. (NSDQ:AMD) now aims to raise $600 million from the issue of common stock and $700 million from the issue of convertible debt. On Friday, 9 September, AMD announced the pricing of its proposed issue of common stock and convertible debt. AMD has also commenced the tender offer to retire its existing long term debt. While the additional costs incurred for debt repayment will offset any near term benefits from reduced interest expenses, the move is great for AMD in the long term. Here's why AMD stock has fallen enough and should stop falling now.
AMD Now Plans To Raise Between $1.26 Bn to $1.45 Bn
On Friday, 9 September, AMD announced the pricing of its proposed issue of common stock and convertible debt. AMD plans to raise $600 million by issuing 100 million shares at a price of $6 per share. The company has also increased the size of its convertible debt issue from $450 million to $700 million. AMD is now raising $700 million worth of convertible debt due in 2026 at an interest rate of 2.125%, which is much lower than the rates that are currently applicable on both its short term as well as long term debt.
The table below has a detailed break-up of the net proceeds AMD will receive after deducting underwriters' discounts and offering expenses. AMD has granted the underwriters a 30-day option to purchase up to 15 million additional shares of common stock and up to $105 million worth of convertible debt over and above the planned issuance. The upper-cap columns reflect the potential impact, should the underwriters decide to exercise these options.
|Common Stock||Cobvertible Debt||Total||Total|
|Planned||Upper Cap||Planned||Upper Cap||Planned||Upper Cap|
|Gross proceeds ($ millions)||600||690||700||805||1300||1495|
|Net Proceeds ($ millions)||580.5||667.6||680||782.1||1260.5||1449.7|
|Interest Rate (%)||-||-||2.125%||2.125%|
Debt Restructuring A Great Move For AMD In The Long Term
AMD plans to use the proceeds to repay its current short term and long term debts. The company is likely to first repay its short term debt, a revolving credit line of $226, which carries an interest rate of 4.25%. AMD will then look to repay its existing long term debt in the order in which it is listed below.
|Break-up of Long Term Debt|
|Amount ($ millions)||Repayment Due||Interest Rate|
What's great for AMD is that it is using cheaper funds to repay significantly costlier debt, while locking in lower interest rates for a longer time, now that rates in the U.S. may be headed higher. The freshly issued $700 million worth of convertible notes will be due in 2026, and carry an interest rate of 2.125%. But while this is great for AMD's long term outlook, there's a near term downside.
Short Term Benefits Could Be Offset By Costs
Since its existing long term debt carries higher interest rates than currently prevailing market rates, AMD will have to pay a premium to retire these debts. AMD has commenced tender offers, which will allow lenders to voluntarily opt to get repaid. Here's what AMD is offering to pay its lenders to retire these debts.
|Dollars per $1,000 Principal Amount of Notes|
|Title of Notes||Tender Offer Consideration||Early Tender Premium||Total Consideration||Acceptance Priority Level|
|6.75% Senior Notes due 2019||1040||50||1090||1|
|7.75% Senior Notes due 2020||977.08||50||1027.08||2|
|7.50% Senior Notes due 2022||1020||50||1070||3|
|7.00% Senior Notes due 2024||980||50||1030||4|
As is evident, AMD is paying a sizeable premium to retire these notes. According to AMD's press release, it will look to purchase not more than $25 million worth of notes due in 2022 and 2024 each. So, assuming that AMD manages to repay its 2019 and 2020 notes fully, and $25 million worth of 2022 and 2024 notes each, the effective weighted average premium works out to about 6.2% or $69 million. Using the same assumptions, AMD's interest expense reduction works out to a little over $64 million.
So, this additional premium combined with offering expenses of about $20 million will wipe out any potential savings on interest expenses for well over a year.
Further, this convertible debt will make lenders eligible to receive 125.0031 shares of Common Stock per $1,000 principal amount of Notes. That could potentially translate to an additional dilution of equity by a little over 87 million shares to 100 million shares, depending on whether AMD raises $700 million or $805 million worth of convertible debt. That said, the conversion price for these notes currently stands at $8 per share, a good 36% above Friday's closing price of $5.90 a piece. So, while this is a concern in the long run, it should not have any impact on shareholders at the moment.
Why AMD Stock Should Stop Falling Now
While AMD's debt restructuring is good news, the fact that the company is issuing new shares which will dilute equity has dragged AMD's stock price. The AMD stock is now down by nearly 20% since the company's first announcement on 6 September.
AMD currently has about 795 million outstanding shares. Depending on whether it issues 100 million or 115 million shares, the company's equity will be diluted by about 13% to 14%. Also, given that the new shares are being issued at a price of $6 per share, AMD shares seem to have factored in the near term impact of equity dilution.
Those who want to play it safe could also factor in the potential dilution upon conversion of debt. At the conversion rate announced by AMD, the company could end up issuing an additional 87 million to 100 million shares. That combined with the 100-115 million shares AMD is issuing now, translates to a total dilution of 24% to 27%.
Based on today's pre-market price of $5.6 a share, AMD shares have now fallen by 24%, and seem to have factored in even this risk, implying that shares should now stop falling, at least on the grounds of capital restructuring.
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