NVIDIA Corporation (NVDA 2.21%) just announced a massive offering of $2 billion in unsecured notes. But considering the GPU specialist ended last quarter with nearly $4.9 billion in cash and equivalents, and only $1.5 billion in debt (in the form of 1% convertible senior notes due 2018), it's obvious NVIDA isn't exactly strapped for cash.
The multi-billion dollar question
Why is NVIDIA raising this much money? According to the company, the net proceeds of the notes -- which will consist of $1 billion of 2.2% notes due 2021, and $1 billion of 3.2% notes due 2026 -- will be used to prefund the repayment of the principal amount of those existing convertible notes, as well as for "general corporate purposes such as dividend payments or share repurchases."
For perspective, when NVIDIA issued those potentially dilutive convertible notes in late 2013, it simultaneously entered into a hedge transaction to deliver shares to offset any dilution from the notes should they be converted, as well as a separate warrants transaction designed to increase the price at which it would need to begin issuing new shares. As I incidentally pointed out in an article I wrote shortly before NVIDIA announced pricing for its latest unsecured notes early last week, NVIDIA's warrants only recently began to negatively affect its diluted share count this past October, when the value of NVIDIA shares skyrocketed above the warrants' strike price (currently $27.04 per share, adjusted for dividends since their issuance).
Here's what it means
First, keep in mind this new debt won't remove those warrants or change the terms of NVIDIA's convertible notes. Rather, it seems NVIDIA is simply getting its ducks in a row in anticipation of repaying the convertible notes upon their December 1, 2018 maturation -- a wise move given the current low-interest rate environment. Meanwhile, comments from NVIDIA's press release indicate any remaining net proceeds from the offering after satisfying the prefunding obligation will almost certainly go right back to funding NVIDIA's ambitious capital returns initiatives, be it in the form of an increased dividend or further repurchases.
If you're wondering why NVIDIA isn't simply using its massive cash hoard to serve this purpose, note around 75% of NVIDIA's cash is currently held overseas. So NVIDIA is avoiding a hefty tax bill it would otherwise incur by bringing that cash stateside to repay debt, pay dividends, or fund additional repurchases.
To be fair, some investors will inevitably argue that NVIDIA may have been better off issuing this kind of unsecured debt in the first place. That original $1.5 billion convertible note offering was, after all, primarily intended to fund share repurchases. And in fact, I even suggested in November, 2013, shortly after NVIDIA announced those notes, that it "would have seemed to make more sense for NVIDIA to simply raise cash at a relatively low interest rate without resorting to such a potentially dilutive solution."
At the same time -- keeping in mind the original strike price of NVIDIA's warrants represented a 75% premium to its late-2013 levels -- NVIDIA's issuance demonstrated an enormous vote of confidence at the time from management that its share price had plenty of room to run from there. And impending dilution or not, it's difficult to "complain" about that calculated bet as an investor who has watched shares of NVIDIA nearly triple in value over the last year alone.
In the end, I'm pleased NVIDIA is killing two birds with one stone now; first, in prefunding the payoff of its convertible debts with a more conservative debt option, and second, giving the company additional flexibility on top of what its already-healthy free cash flow can accomplish in the way of continuing to reward shareholders with strategic capital returns.