Re: Their balance sheet is starting to look great, but they've thrown away a lot of money on these 'pre-payment penalties'.
I am sure "they" too can do the math and look up the yield spreads. They probably threw away a few bucks on Spansion too.
They probably threw away a few bucks on this week's stock offering, too. I was hoping they'd wait a little longer and do $1 billion. Maybe they'll get the other $0.5 billion from selling Spansion shares within a year or so.
There's more to it than yield spreads. Every time you take on long-term debt, you're essentially buying insurance against future interest rate hikes and potential liquidity problems due to business reverses. Same thing with doing the secondary offering now.
There's been a chain of these pre-payment penalties. They paid off the Dresden Term Loan with the 7.75% loan in 2004 and paid a penalty. They eliminated a compensating balance requirement, but I assume they got compensating interest on that balance. I'm a little unclear about the terms of the Dresden loan, but it might've been at 15%. The Dresden loan had big payments due in 2005 and 2006, so they insured themselves against being short of cash then by pushing out the principal repayment until 2012.
Apparently they got better interest on the 7.75% issue by paying a premium to convert some of the 4.50% convertibles early. I don't know what the interest might've been otherwise, but they only knocked a year off those convertibles at low interest and saved maybe 1 or 2% on the higher interest 7.75%. I think they should've gutted it out and waited until last month to convert all of the 4.50%.
Now they're paying a penalty to retire 35% of the 7.75% for which they paid a penalty to get it reduced by a couple of points. You could argue that 13.5% per annum for the past 16 months is better than the interest on the Dresden loan, but it really isn't, considering the prepayment penalty on the Dresden loan. And I would argue that the prepayment penalty on the 35% pretty much nullifies the presumed interest savings on the remaining 65% for the next six years.
So enough of this refinancing wizardry!
The question I have for you is - why do they need to improve their ratios now? Could they not have waited for another Q or two for the cash to build up?
One thing I see is that their balance sheet is going to look better than Intel's. Intel's current ratio, a key measure of liquidity, is down to 2.25, which I think is probably the lowest in thirty years or more. And AMD's, which was less than 2.0 (bad) at the end of 2005, will probably be at least 2.25 at the end of Q1.
But the real answer to your question may be that a gigabuck mortgage on Fab 36 or 38 is in the offing so they can fully equip them.
On yeah, one more thing, personal to DRBES: one of the terms of the 7.75% notes is no dividends. |
