As I alluded to in an earlier post, last week Cray filed a Form 8-K [PDF] with the Securities and Exchange Commission, “Report of unscheduled material events or corporate event.” The unscheduled material event is the buy down of 50% of Cray’s outstanding debt, held as Convertible Senior Subordinated Notes. BusinessFinance.com has an explanation of what a Convertible Note is here, but basically you should think of it as a loan that the lender can convert to shares of stock at some point in the future.
From the filing:
On October 1, 2008, we repurchased $25,000,000 in principal amount of our 3.0% Convertible Senior Subordinated Notes due 2024 (the “Notes”) at a price equal to 92% of par value plus accrued interest.
On October 2, 2008, we repurchased $15,200,000 in principal amount of Notes at a price equal to 91.5% of par value plus accrued interest.
After these purchases we have an aggregate principal amount of $39,800,000 of Notes outstanding.
There are a few important things to note here. First, Cray is buying back this debt at a discount of roughly 92% in each case. This is great for them, since they got to borrow 100 dollars and only pay back 92 ($92 on the first and $91.50 on the second). They were able to do this because the lenders were desperate for cash in the wake of the ongoing financial turmoil.
Second, the company has taken this action when the credit markets are fairly seized up. The short term credit markets are important for all kinds of businesses, including Cray, because they use these markets to borrow money to buy the pieces and parts they use to make their final products. Customers don’t pay before they receive the product, but you can’t build the product without the parts. Cray is indicating with this move that their cash position after the move is still strong enough that they won’t have trouble filling orders in the near term. I’m not a financial guy, but this to me seems like the actions of a relatively healthy company.
Cray CEO Pete Ungaro had this to say in an email exchange about the move:
“We are very excited about this transaction. We feel confident enough in both our short and longer-term financial position to be able to buy back the notes at a nice discount and strengthen our balance sheet — a move that is positive both for our shareholders and customers alike.”