Super Micro Computer has emerged as one of the standout stocks of the year, capitalizing on its success as a provider of high-end servers for AI applications to secure a groundbreaking financing deal.
Ultra-Low Interest Rate Bond Offering
In a bold move, the company recently launched the market’s first zero-coupon convertible bond issuance since 2022, raising $1.5 billion through bonds that will mature in 2029. What sets these securities apart is their zero-percent interest rate, coupled with a conversion premium of 37.5%.
Strong Demand Amidst Unique Market Dynamics
The decision to offer these bonds at such a low rate was heavily influenced by the significant demand from convertible investors seeking exposure to AI-related opportunities in a limited market landscape. According to Michael Youngworth, the convertibles analyst at BofA Securities, the average yield on convertible bonds issued this year has hovered around 3%.
Reflecting Back on Historical Precedents
Looking back to 2021, zero-coupon convertible bonds were a rarity, with the Treasury 10-year note yielding less than 2% and short-term rates hovering near zero. Notable issuers of zero-coupon convertibles during that period included Affirm Holdings, DigitalOcean, and Confluent.
Limited Availability for Retail Investors
The offering of these zero-coupon convertibles is restricted to “qualified institutional buyers” under Rule 144A of the Securities Act of 1933, precluding individual investors from participating in this unique opportunity. However, there remains a possibility that these bonds could become accessible to retail investors in the future.
Super Micro Computer’s foray into this unconventional financing approach is not only strategic but also showcases its willingness to innovate in the realm of corporate finance.
Super Micro’s Stock Performance
Super Micro’s shares experienced an 11.8% decline on Friday, dropping to $860. This decrease was partly attributed to hedging by convertible-bond arbitragers who engaged in buying the convertibles and simultaneously selling short the stock as a hedge strategy. Surprisingly, despite the stock’s decline, the new convertible made progress, with late Friday trading hovering around $103 compared to the offering price of $100.
Impressive Stock Growth
Throughout the year, Super Micro’s stock has seen a remarkable threefold increase, and in the past twelve months, it has surged about tenfold.
Conversion Premium and Oversubscription
Deal Insights and Future Potential
While the conversion premium currently stands at a considerable level, the stock’s volatility plays a significant role in the models utilized by convertible arbs. This offering essentially represents free money for Super Micro in comparison to a typical straight bond deal that might yield around 6%. With such high demand, there is a possibility that the underwriters will exercise their “green shoe” option to introduce an additional $225 million worth of bonds into play.