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What About AMD's Convertible Bonds?


For the company's bondholders, settlement with Intel was a home run.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial). It's being shared here for the benefit of the Minyanville community.

Lost in the shuffle amidst yesterday's settlement between Intel (INTC) and Advanced Micro Devices (AMD) was the reaction in AMD's convertible bonds.

For those who missed it, Intel and AMD settled all the anti-trust and patent disputes, with Intel agreeing to pay AMD $1.25 billion. For AMD bondholders, who had seen their holdings trading as low as $0.30 on the dollar in the past year, this was a home run.

Back in 2007, AMD issued two pieces of convertible paper. The first came amidst one of the market's renaissance periods. AMD was able to sell $2.2 billion of paper with a 6% coupon -- that wasn't the shocking part. The stunner was the 100% conversion premium. AMD's stock was around 14 at the time, but it had gone above 40 just over a year earlier, so for some investors, the notion of the stock getting above 28 in the next eight years didn't seem so absurd.

The market ended up gagging on those bonds, though, only to get kicked in the head when Lehman Brothers shocked the market a few months later by buying a new $1.5 billion deal with a 5.75% coupon and a 50% premium. The superiority of these bonds to the previous issue was obvious: For only giving up 25 basis points, holders got a conversion price of 20 instead of 28. Plus, the Lehman bonds had a 2012 maturity, three years in advance of the 6% convertibles. This forced the 6% issue, just a few months old, down several more points. Lehman, which had a generally stellar reputation for its ability to place convertible issues in strong hands, had a much harder time than usual getting rid of these bonds. Of course, this proved to be the least of Lehman's problems.

AMD's history, dating back to the 1970s, provides a continuous boom-bust cycle even by the standards of the semiconductor industry. The company has always found a way to survive, despite -- or perhaps, because of -- its ongoing second-fiddle status. A single-digit stock in the late 1990s, AMD had a monster spike into the 40s right before the end of the dot-com boom. Falling again to low single digits in the recession of 2002, AMD got a new head of steam a few years later as, for a time, it was gaining significant market share from Intel. Throughout all this, AMD has regularly tapped the convertible market to keep it afloat and provided great opportunities for convertible investors to lose -- and make -- money.

With yesterday's action, the Lehman-issued 5.75% bonds traded up to $0.99 on the dollar. They mature in less than three years and are probably as close to money-good as any AMD paper of such tenor is going to get. Meanwhile, the downtrodden 6% bonds now trade around 80. They may well go higher, as they now offer a better-than-10% yield amidst positive news flow. But if history is any indication, in the six years between now and the time the bonds mature, you'll get another chance to buy them cheaper.
No positions in stocks mentioned.

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