Americas Structured Equity Issue: Wolfspeed's US$1.75bn seven-year convertible bond

IFR Awards 2022
3 min read
Stephen Lacey

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Wolfspeed powered into the equity-linked market in November with an upsized US$1.75bn seven-year convertible bond, its second in 2022 and the second-largest US CB of the year.

At its annual investor day on October 31 the chipmaker outlined plans to spend US$6.5bn through 2027 to expand manufacturing capacity of silicon carbide wafers used in electric vehicles and other electronic devices. The capex plans were well above prior guidance and came with indications that management were exploring options to limit earnings dilution, including the possibility of funding from government and/or a strategic partner.

At the time, Wolfspeed was negotiating a US$500m strategic investment and agreement to purchase US$650m of silicon carbide annually with BorgWarner.

The automotive supplier’s stipulation that its investment come in the form of term debt rather than preferred stock (to provide a clearer exit timeline) led to the decision to fund with a CB.

"For BorgWarner, it was important to procure silicon carbide to ensure they can support their customers," said Karl Steffen, Wolfspeed’s treasurer. "We were able to set up a parallel agreement that gave them the silicon carbide capacity they were looking for in exchange for a US$500m investment.

"We knew we could put together a convertible debt deal fairly quickly that gave BorgWarner the hard maturity they were looking for and provided us with an anchor order to build momentum while minimising the impact of hedge fund participation."

Morgan Stanley and Wells Fargo launched a US$1.3bn CB after the close on November 16. This was just six days after striking the deal with BorgWarner, and priced a US$1.525bn offering the following day at a 1.875% coupon and 35% conversion premium. Exercise of the greenshoe increased proceeds to US$1.75bn, including the US$500m from BorgWarner.

Wolfspeed spent roughly US$275m of the proceeds on a capped call to offset dilution from the CB up to a share price of US$202.54, a 130% premium to the US$88.06 reference share price and versus the US$118.08 mark at which investors can convert.

"The huge benefit of the anchor order was that US$500m of the US$1.3bn was already placed," said Diana Doyle, Morgan Stanley’s co-head of tech ECM for the Americas. "Not only was it placed, it was placed with a long-only strategic investor."

Wolfspeed had tapped equity-linked in January, securing US$750m from the sale of a 0.25% security maturing in 2027 that used a capped call to lift the effective conversion premium to 125%. It is likely to remain a repeat issuer given planned capex will not see free cashflow positive results until 2026.

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