Micron Technology Inc., a memory chip maker based in Boise, intends to offer institutional buyers $440 million worth of convertible senior notes.
This debt instrument may be converted to shares of common stock subject to a number of conditions, such as a call date to be determined, date of maturity and share price of Micron stock.
According to Keith Harvey, finance professor at Boise State University, companies often use convertible debt securities when they’re trying to conserve cash.
“Rather than issue straight bonds with a higher rate, it allows Micron to pay at a lower rate,” he said.
Harvey said companies also sell convertible notes when their executives think their shares are undervalued, but don’t want to commit to a high interest rate on debt. A convertible note acts like a hybrid financial instrument with the qualities of both a bond and stock. The result is in an expected return and risk profile for the investor that lies between a bond and stock.
Micron and the first purchasers of these notes will negotiate specific terms, including the interest rate and initial conversion price to stock. Ultimately, the company’s objective is to convert these bonds into stock at some point, according to Harvey.
But if Micron’s stock price goes up rapidly, then company executives could regret having sold convertible bonds rather than issuing debt to be refunded with a share at the higher price.
Micron, though, is hedging its bets somewhat in this case by using “capped call” options for these notes. If the price of Micron’s stock goes up, the company will receive payments as a result of this derivative. But those options are capped at a certain price, so if the stock goes up beyond that “cap,” the company will no longer have a hedge against that risk.