AMD announced last night that they were going to offer a convertible notes issues. The exact specifics of the issue were just released.
What’s a convertible bond issue? It goes like this: You lend me W dollars for X years, and I’ll either pay you Y percent interest for those years, or, if certain things happens, let you trade your bond for Z number of stock shares in my company.
In AMD’s case, the exact terms are as follows: You lend me $1,000 for eight years, and I’ll pay you 6% interest a year, and if certain things happen, I’ll let you trade your $1,000 bond for 35.6125 shares of AMD stock.
In this case, this deal becomes very good for buyers if the price of AMD stock gets a lot above $28 or so in the next couple years, not so good if it doesn’t.
However, this isn’t so good for the other AMD shareholders because if all the people owning the bonds cashed them in for shares, that would increase the number of AMD shares outstanding by about 15%, which would help devalue the other shares.
AMD has promised a few financial tricks (that’s the “capped call transactions”) to help remedy that, but, to make a long and very boring story short, that’s pretty iffy.
What to think? Provided people buy the issue, it ought to keep AMD funded for the rest of the year, and if things don’t look a good deal better then than they do now (and they had better), 2008 is pretty moot.