NVIDIA Corporation (NASDAQ: NVDA) just announced a massive offer of $ 2 billion in unsecured notes. But given that the GPU specialist ended last quarter with nearly $ 4.9 billion in cash and cash equivalents, and just $ 1.5 billion in debt (in the form of senior 1% convertible bonds due in 2018), it’s obvious that NVIDA isn’t exactly cash-strapped.
The multibillion dollar question
Why is NVIDIA collecting so much money? According to the company, the net proceeds of the notes – which will consist of $ 1 billion of 2.2% notes due 2021 and $ 1 billion of 3.2% notes due 2026 – will be used to pre-fund the repayment of the principal of these existing convertible bonds, as well as for âgeneral corporate purposes such as the payment of dividends or the repurchase of sharesâ.
As a prospect, when NVIDIA issued these potentially dilutive convertible bonds at the end of 2013, it simultaneously entered into a hedge transaction to deliver shares to offset any dilution of the bonds in the event of conversion, as well as a warrants transaction. separate designed to raise the price to what it would need to start issuing new shares. As I pointed out in an article I wrote shortly before NVIDIA announced the price of its last unsecured notes early last week, NVIDIA’s warrants have failed. only recently began to negatively affect its diluted share count last October, when NVIDIA’s stock value soared above warrants. ‘strike price (currently $ 27.04 per share, adjusted for dividends since issuance).
This is what it means
First of all, keep in mind that this new debt will not remove those warrants or change the terms of NVIDIA’s convertible notes. On the contrary, it looks like NVIDIA is just lining up in anticipation of the redemption of the convertible notes when they mature on December 1, 2018, a wise move given the current low interest rate environment. Meanwhile, comments from NVIDIA’s press release indicate that any net proceeds left over from the offering after meeting the pre-financing obligation will almost certainly go back to funding NVIDIA’s ambitious return-to-capital initiatives, whether in the form of an increased dividend or new buybacks.
If you’re wondering why NVIDIA isn’t just using its huge cash reserve for this purpose, note that around 75% of NVIDIA’s money is currently held overseas. In doing so, NVIDIA is avoiding a hefty tax bill it would otherwise incur by bringing that money to the United States to pay down debt, pay dividends, or fund additional buyouts.
To be fair, some investors will inevitably say that NVIDIA might have been better off issuing this type of unsecured debt in the first place. This initial offering of $ 1.5 billion convertible notes was, after all, primarily intended to fund share buybacks. And in fact, I even suggested in November 2013, shortly after NVIDIA announced these notes, that it “would have made more sense for NVIDIA to simply raise funds at a relatively low interest rate without resorting to such a potentially dilutive solution. ”
At the same time – bearing in mind that the initial strike price of NVIDIA’s warrants was a 75% premium over its end-2013 levels – NVIDIA’s issuance demonstrated a huge vote of confidence at the time of management that its stock price had plenty of room to run from there. And dilution imminent or not, it’s hard to “complain” about this calculated bet as an investor who has seen NVIDIA shares nearly triple in value in the last year alone.
In the end, I’m glad NVIDIA is now killing two birds with one stone; first, by pre-financing the repayment of its convertible debt with a more conservative debt option, and second, by giving the company additional flexibility on top of what its already healthy free cash flow can accomplish by continuing to reward shareholders. with strategic returns of capital.
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