Summary
Advanced Micro Devices, Inc. (AMD) reported the termination of a capped call transaction with Lehman Brothers OTC Derivatives Inc. This termination was necessitated by Lehman Brothers' Chapter 11 bankruptcy filing. The capped call was originally put in place to mitigate potential dilution from the conversion of $2.2 billion in 6.00% Convertible Senior Notes due 2015, issued in April 2007. By terminating the agreement, AMD loses the intended benefit of receiving shares to offset dilution upon note conversion.
Key Highlights
- 1AMD terminated its capped call transaction with Lehman Brothers OTC Derivatives Inc.
- 2The termination is a direct result of Lehman Brothers' Chapter 11 bankruptcy filing.
- 3The capped call transaction was designed to offset potential stock dilution from AMD's $2.2 billion Convertible Senior Notes due 2015.
- 4AMD is seeking reimbursement for the loss incurred from terminating the capped call.
- 5The recoverability of the claimed reimbursement is uncertain due to the ongoing Lehman Brothers bankruptcy proceedings.
- 6The termination of the capped call transaction eliminates AMD's ability to mitigate dilution through this specific mechanism.
- 7AMD anticipates potentially disadvantageous tax consequences, including the use of net operating losses against triggered taxable income.
Frequently Asked Questions
The capped call transaction was intended to reduce the potential dilution of common stock for existing shareholders. This was to be achieved by allowing AMD to receive shares of its common stock from the counterparty (Lehman Derivatives) that would generally offset the shares issued upon conversion of the $2.2 billion in Convertible Senior Notes due 2015.
AMD terminated the transaction because Lehman Brothers, the counterparty's agent, filed for Chapter 11 bankruptcy. This filing constituted an 'event of default' under the terms of their agreement, giving AMD the right to terminate.
AMD is seeking reimbursement for the loss incurred from the termination. However, the recoverability of this claim is uncertain due to the bankruptcy proceedings. Furthermore, AMD expects potentially unfavorable tax consequences, including the utilization of a significant portion of its net operating losses against taxable income that may be triggered by this event.
The termination means AMD can no longer use the capped call transaction to mitigate potential dilution upon conversion of the notes. While the notes themselves are not directly affected, the impact on AMD's share count and earnings per share, should the notes be converted, will be more significant than originally anticipated.