A Look Into AMD’s Latest Public Offering

Recently, AMD (NYSE:AMD) issued a press release announcing its intent to commence concurrent public offerings of approximately $600 million of its common stock and $700 million of 2.125% convertible senior notes due 2026. The company said that, with the capital raised from this offering, it intends to retire existing debt and invest the net proceeds after repayment in capital expenditure and net working capital. Although this move should result in a significantly lower interest burden for AMD, its stock price has plunged by approximately 24% since it made this announcement last week. This is because investors have factored into AMD’s valuation the impact of equity dilution from the issuance of the common stock and the potential dilution that can arise due to conversion of its debt at $8. Taking into account the drop in stock price, the company has decided the price of the public offering of $600 million common stock at $6.00 per share. Below we investigate the effect of the public offering of common stock and convertible debt by AMD in more detail:

Interest Burden For AMD To Be Significantly Lowered

It must be noted that the interest expense on a convertible bond is lower as compared to the interest expense arising from the issue of a standard nominal bond. This is because bond holders get a chance to participate in the upside potential of the company’s stock price at the cost of a lower yield on the bond. The fact that AMD intends to use the net proceeds from the offering to retire its existing debt should help it significantly reduce its interest burden. It is worth noting that AMD is issuing the new convertible bonds at an interest rate of 2.125% per year payable semiannually. This is much lower when compared to the interest rate that is applicable on the company’s existing debt. Furthermore, AMD’s new debt will be due in 2026. This implies that the company will be able to lock in the lower interest rate for a longer period of time, at a time when Fed is expected to hike interest rates. Moreover, considering the riskiness of AMD’s business, debt holders would have demanded a hefty premium from the company, had it issued a standard nominal bond. Prior to June’16 quarter, the company had been reporting net losses for six quarters consecutively.

Scope For Higher Growth Going Ahead

Given that the company intends to invest the remaining net proceeds after repayment of its existing debt in capital expenditure and net working capital, this offering should result in stronger growth for the company in future. Also, lower interest payments should help the company gain more cash profits. AMD can use the savings on interest payments to expand its business, which might result in higher valuation for the company. Depending on the impact of the reinvestment on AMD’s future earnings, it would be interesting to note if higher earnings would be able to offset the effect of dilution on the company’s earnings per share.

See our complete analysis for AMD here

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