Hey Uncle - some interesting thoughts on MU convertables
from SoftServ on the FOOL
Basically, Micron raised debt capital from investors (as opposed to selling equity capital), but as part of the contract, Micron had the legal right to simply pay back the remaining debt before it actually matured in 2005. With these convertibles, though, Micron does not pay back the debt holders with cash, but instead pays them back through turning the debt into equity (stock). In doing this, Micron is slightly changing its capital structure.
From a debt holder's point of view, there are some potential benefits to convertible notes, but in general this is a riskier investment. Being convertible introduces another possible outcome to the scenario for investors that they do not have control over - this is risk for the investors. The benefit for Micron is that it allows them to be more flexible if their business changes.
Since Micron is getting a benefit at the expense of the investors having to take on additional risk, Micron has to sweeten the deal somehow otherwise the investors will supply their cash to someone giving better terms. The way Micron sweetens the deal is through offering a slightly higher interest rate on the notes - this way the investors are happy to take on more risk because the return is expected to be higher.
What does it mean, then, that Micron decided to convert this debt?
Turning the debt into equity is a more expensive thing for Micron to do. Since as an investor holding equity is much riskier than debt, you require a much higher return to compensate for the risk. The returns on equity, however, do not come in the form of cash payments like debt, but rather come as growth in the market value of the equity. This is more expensive to Micron because they are essentially giving away growth in the market value of the equity that they otherwise would have had as their own.
The equity truly is more expensive to Micron, but the benefit is that the expense is non-cash. With debt, the company has to make fixed cash interest payments, but with equity the company does not give up any cash - the added expense is shown in the on paper financial structure of the company.
It is interesting that Micron would take this move, because it signals that they would like more cash to be available in their operations. Very crudely, not having to pay 6 1/2% on 740 million is cash savings of 45 million a year (again - a crude calculation). Assuming that the debt was initially taken because it was relatively cheap and the company already generated enough cash to fund its regular operations, why would Micron now want to have this additional cash in its pocket? At the added expense of giving up equity in itself?
This is SPECULATION,
But what could the extra cash be used / needed for?
Think legal fees...
Think settlement fees...
Think royalty payments...
What do YOU think?
Finding this little press release quite interesting,
Softserv |
