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VIDEOIntel Convertibles Hit the Road?
A sign that liquidity has gone from nonexistent to plentiful.
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It’s not too bad at trading, either.
Intel was one of the first companies to offset the dilutive effects of employee stock options by selling puts on its own stock (thereby either repurchasing stock at a discount or pocketing large premiums on ultimately worthless options) to Wall Street dealers. It excelled at putting dealers in competition to get top dollar for these options.
Later, Intel issued warrants on its own stock to the public, tapping into the public’s demand for leveraged means to bet on the stock during the flying markets of the 1990s.
More recently, Intel issued $1.6 billion in 30-year convertible bonds in late 2005. The bonds’ 2.95% coupon wasn't appreciably higher than the dividend the company was paying, and the extremely long maturity (especially on a top-quality credit like Intel) meant that the company was raising cheap, stable, long-term capital. It didn’t need the money, but smart companies don’t miss opportunities to get cheap money when they can. They can usually find a good use for it.
Now, it's 2009, and the resurgence of a convertible market left for dead in 2008. Money is flowing back to convertible managers, with the asset class showing some of the best results of any strategy this year. That money needs a new home, and Intel is happy to oblige. The new deal is trading at a premium in the when-issued market, meaning that there’s plenty of demand. It’s being issued under Rule 144a, meaning it won’t be available to individuals for several months.
When convertibles get hot, big deals come to market to sop up the incoming cash. As big new deals go, this one is neither awful nor great. Keep in mind, Intel is using a significant portion of the proceeds to buy back stock to offset dilution, so that there will be little if any arbitrage-related pressure on the stock.
With a savvy issuer like Intel coming to market, I’d expect a lot more companies that don’t need the cash -- but see a signal that liquidity has gone from nonexistent to plentiful -- will hit the market with convertibles, particularly once the summer doldrums are over.
Stay tuned, and keep an eye out for my upcoming book, The Undoing of Cowardice, which among other things discusses how convertibles can help you outperform the so-called professionals.
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