Super Micro Computer
has been one of the hottest stocks this year and the maker of high-end servers used for AI applications took advantage of that status to borrow at an ultralow interest rate.
In the market’s first issuance of a zero-coupon convertible bond since 2022, the company priced $1.5 billion of convertible bonds due in 2029. The securities have a zero-percent interest rate and a conversion premium of 37.5%.
The low rate was a sign of huge demand from convertible investors given the lack of AI plays in that market. The average yield on convertible bonds priced this year has been around 3%, according to Michael Youngworth, the convertibles analyst at BofA Securities.
In 2021, when convertible bonds regularly carried zero-percent rates, the Treasury 10-year note was yielding under 2% and short rates were around zero. Issuers of zero-coupon convertibles in 2021 included
Affirm Holdings,
DigitalOcean,
and Confluent.
The deal is being offered and sold to “qualified institutional buyers” pursuant to Rule 144A of the Securities Act of 1933, the company said in a news release earlier Friday. This means that individual investors won’t be able to purchase the bonds. It is possible that the bonds ultimately could be available to individual investors in a year or so.
Super Micro shares fell 11.8% Friday to $860 in part due to hedging by convertible-bond arbitragers who bought the convertibles and sold short the stock as a hedge. Even with the drop in the stock, the new convertible moved higher, trading late Friday at around $103, against an offering price of $100.
Super Micro stock has tripled this year and has risen about tenfold in the past year.
The conversion premium widened with the drop in the stock, hitting about 60% on Friday’s close. Each $1,000 bond is convertible into stock at $1,341 a share, or about 0.75 of a share per $1,000 bond.
Even with the large size of the deal, it was said to be many times oversubscribed. That was evident in the strength in the convertible bond price in the face of a sharply lower stock price Friday. While the conversion premium is very high now, the stock is volatile and that factors into the models used by convertible arbs.
The deal effectively amounts to free money for Super Micro relative to a regular, or straight bond deal that might yield around 6%. Given the strong demand, the underwriters may exercise their “green shoe” option to offer an additional $225 million of the bonds.
Write to Andrew Bary at [email protected]
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