Last night, Advanced Micro Devices (AMD-NYSE) dropped the ball that it was selling $1.8 Billion in senior convertible notes and shares were down 3% in after-hours and pre-market activity. This morning shortly before the opening the company announced the pricing, and by some grace of the powewrs that be the pricing of this is being viewed as "almost favorable" to AMD. As a result shares are really trying to make a comeback today.
The company is actually taking in $2 Billion gross before fees in a rule 144A (private placement to institutions) issue. Somehow they are only having to pay 6.00% in notes due in 2015, and the convertible pricing was actually at $28.08 (36.6125 shares per $1,000 principal face amount).
There is an interesting note here though. Holders of the notes may require AMD to repurchase the notes for cash equal to 100% of the principal amount to be repurchased plus accrued and unpaid interest upon the occurrence of certain designated events. Without having seen the actual "events" it is hard to know what these covenants are, but the industry would refer to these as "death puts" in modern days. We’ll try to get a copy of the offering to see what these "occurrence of certain designated events" really is, but this can create a situation where common stock holders can get squeezed even further if the note holders decide to PUT bonds back to the company. If the company has to take these back because of unfavorable events, then the carnage will start all over again and it would be in a worse spot than before.
As noted last night, "at least" $500 million of the notes will be used to repay Morgan Stanley’s term loan used to help it acquire ATI Technologies. I also received an email "from someone who said they were short the stock" that the company was actually outside of its covenant agreements with Morgan Stanley until this repayment was announced, and that could have had a very negative impact on the company and its common stock shareholders. So if that is the case, then that is why this is only down 1% now.
Who knows how this one will really turn out, but the company is sure asking investors to be more than understanding and more than generous in the terms. Imagine what rate and convertible price would have been demanded without price caps and without a death put caluse in there.
If you consider how much the company is having to repay and the amounts used for the derivative caps and then compare it to the "real" funds received, then this debt offering comes at much higher costs than it seems. If you go back through the records you can see that they picked the price war without making sure they were truly ahead in performance and delivery capabilities of the dual-core processors compared to Intel (INTC). It also acquired ATI Technologies after its stock had undergone a massive slide rather than when the stock was way up. AMD has developed a serious credibility issue, and it is more than difficult trying to warm up to the company.
This is still voodoo financing by almost any measure. AMD stock is actually holding up rather well considering the credibility gap. Shares may even go back to positive after the 3% drop based on the strength seen in early trading, but the company still has a lot of road ahead and has even more to prove.
Jon C. Ogg
April 24, 2007
Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.
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