Why AMD's Securities Offering Is Positive Despite Shares Falling

Jon C. Ogg

Any time that investors see a stock down 6% or more, they probably aren’t going to be too keen on hearing that the drop is actually supposed to be good news. If that big drop is from a securities offering that may dilute their right to future earnings, and after dilutive news a week or two earlier, then they may understandably double-up on their challenge that the drop was actually good news. Now there is a situation where bad news may be good news in the case of Advanced Micro Devices, Inc. (NASDAQ: AMD).

AMD shares were hit hard, down over 6%, after news from Tuesday evening that AMD is issuing just over $1 billion in new securities. The offering was listed as being $600 million in common stock and $450 million in convertible senior notes. On top of that, AMD granted the underwriters a 30-day overallotment option to purchase up to $90 million in shares and up to $67.5 million of the convertible senior notes. That makes the real potential offering $1.2 billion if the overallotment is taken.

So, how can this be good news? There is not just one answer here, but all of this points to a less burdened AMD in the near-term and in the long-term. It also has to be assumed that AMD shareholders were not looking for a dividend any time soon.

AMD’s cash balance at the end of June was roughly $957 million. AMD had another $671 million in accounts receivable and $743 million in inventory. Its current liabilities came to $1.58 billion, and its total long-term debt was $2.01 billion. AMD’s total assets of $3.316 billion, which includes plants and equipment and goodwill and intangibles, was less  than its $3.73 billion in total liabilities.

It is important to understand that all of this ties in with AMD’s recent news that it entered into a new Wafer Supply Agreement with GlobalFoundries. This created a change to the terms and created potential dilution from warrants.

Now look at what AMD plans to do with its cash from the securities offering. AMD said that it will use the proceeds from both offerings to repay up to $226 million in borrowings, as well as to purchase up to $1.02 billion worth of senior notes.

AMD also has the option, after the tender offer, to call any and all of the untendered 7.75% Senior Notes due 2020 with any remaining net proceeds. As for any unused capital from the offering, AMD said that can be used for capital expenditures, working capital and other general corporate purposes.

Moody’s Investors Service has just affirmed AMD’s ‘Caa1’ corporate family rating and has affirmed its ‘Caa2’ rating on the senior unsecured notes. Not only that, Moody’s revised the rating outlook to Positive from Negative.

This move will potentially decrease the net debt, and even if it is just extended out it is still moved out to where close to half of its longer-term debt does not come due for ten years. And with it being convertible, that debt could ultimately be converted into common shares and drop off the bad side of AMD’s balance sheet entirely.

Now consider that AMD’s stock has been on a giant run in 2016. That is understatement, and a massive one at that. AMD shares are still up over 155% so far in 2016 alone, and they are up 300% over the last year! No other major chip company can claim that at this time.