What Should Micron Prioritize—Convertible Debt or Straight Debt?



Investors assess Micron’s debt repayment strategy

Now Micron Technology’s (MU) cash flow is strong, the company has returned to strengthening its balance sheet—which the previous management leveraged. Micron’s two cash priorities of capital expenditure and debt repayment are viewed by different investors in different ways.

Some investors believe that this is the right time for Micron to repay its debt. However, some investors believe that it is the right time to take on more debt at a cheaper rate and invest in the company’s future.

Investors who prefer debt repayment are also divided on how Micron should implement its repayment strategy. These investors are debating whether Micron should pay its convertible debt or straight debt first.

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Straight debt

Some analysts favor repayment of straight debt, which would reduce the company’s interest expenses. It would also increase its cash reserves, which would otherwise have been used to repurchase convertible debt.

Even if Micron does not pay its convertible debt, dilution is possible in the future. However, interest earned from large cash reserves would offset dilution from the recent equity offerings.

Convertible debt

Industry observers have made the case that Micron should retire its convertible debt first. Micron accumulated a huge amount of debt as its former chief financial officer, Ron Foster, issued billions of dollars of convertible securities. This debt was issued to fund the acquisition of Japan-based (EWJ) Apple (AAPL) memory chip supplier Elpida Memory in 2013.

Not only was this debt hedged properly but Foster also issued more convertible debt to repay part of its other convertible debt. This action leveraged the balance sheet.

During the memory uptrend in 2014 and 2015, Micron used its cash flows to repay as much of its convertible debt as possible.

Micron’s former vice president of investor relations, Kipp Bedard, stated that the company’s priority is to reduce convertible debt to mitigate the resulting dilutive effect.

Micron was hit by a DRAM (dynamic random access memory) downturn in 2016, which stalled the company’s debt repayment program. Now that the company is back to repaying debt, these bonds increase 2 million shares for every $1.00 increase in Micron’s stock price.

As Micron repays its debt and stabilizes its cash flows, many analysts are assessing whether it would start giving shareholder returns in the future. We’ll look at this possibility in the final part of this series.


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