Last month, Cerence (NASDAQ:CRNC) pulled the trigger on part of its plan to restructure the bulk of its debt by conducting a convertible senior note offering to raise capital. In addition to issuing that paper, Cerence has also negotiated a new credit facility to refinance a previous credit facility, further reducing interest costs.
Here's how much the company stands to save.
Interest savings will significantly boost profitability
This week, Cerence announced that it has completed its debt refinancing efforts. The institutional investors that participated in the aforementioned convertible bond offering ended up exercising options to purchase $25 million more in bonds, bringing the total amount raised through the deal up to $175 million.
Cerence also now has a new $125 million senior secured term loan facility that it closed just a few days ago. The new facility carries a current interest rate of 3.5%, or half of the 7% that the automotive artificial intelligence (AI) company was paying under the old facility. The rate under the new facility is subject to change, however, as that debt carries a floating rate based on Libor plus a spread. There's also a $50 million revolver included in the new facility that Cerence can tap if need be.
The company started the year with approximately $270 million in debt, in part to help fund a cash distribution to Nuance Communications, which spun off Cerence into an independent entity late last year. The freshly public company also needed some cash to start the business with. CFO Mark Gallenberger previously estimated that restructuring the debt could translate into annual interest savings of around $5 million. The interest savings will end up much greater than that.
Based on how much Cerence owed at the beginning of the year, the company estimates that interest savings for the first half of 2020 would have been $5.7 million, but that figure is largely fictional since that interest has already been paid. The more important figure is that Cerence expects to save $11.5 million in annualized interest expense going forward.
"I am very pleased with the successful completion of our refinancing efforts, and the proceeds from the convertible offering and the [new credit facility] have already been used to pay down the entire remaining balance of the [old credit facility] thus resulting in immediate significant interest expense savings on a go forward basis," Gallenberger said in a statement yesterday. "The remaining proceeds after the pay down of the [old credit facility] will be used for general corporate purposes."
The savings will meaningfully contribute to Cerence's overall profitability. Adjusted net income over the past two quarters would have been 16% higher under the new debt structure. On a GAAP basis, the bottom line would have been nearly nine times as large.