SoFi Technologies (SOFI 0.50%) investors had a fabulous February as shares of the fintech stock gained nearly 15% after its fourth-quarter earnings report showed SoFi turned profitable faster than expected.
SoFi stock is giving back all those gains today, though -- and more. As of 11:20 a.m. ET, the stock is down 11.5% on news that SoFi is cashing in on its stock market gains and taking on $750 million in new debt.
NASDAQ: SOFI
Key Data Points
What is SoFi up to today?
SoFi announced this morning that it intends to place $750 million worth of convertible senior notes due in 2029 with unnamed private investors and to offer an overallotment option that could raise the debt offering's total value to $862.5 million. The company did not state what interest rate it would pay on this debt. Still, it's curious that -- with much of the stock market convinced that interest rates are about to come down in a big way later this year -- SoFi felt compelled to do this particular debt offering right now and not wait for better rates.
That seems to suggest the company feels strapped for cash -- potentially bad news for investors, which could explain why investors are reacting negatively to the news. Moreover, that this is convertible debt implies the possibility that the debt could become stock at some point in the future, diluting shareholders out of part of their ownership stakes in the company.
That would be another reason for investors to be upset.
Why might investors be wrong about SoFi?
But now, let's look at the flip side.
SoFi says it intends to use some of the cash raised from this debt offering to redeem certain preferred stock that is already costing the company 12.5% in annual dividends. So, unless the interest rate on the convertible debt is greater than 12.5%, this deal could potentially decrease SoFi's interest costs -- and thereby increase its profits.
Furthermore, other proceeds from the offering will be used to enter into what the company calls "capped call transactions." And without getting too technical, what this means is that SoFi will "reduce the potential dilution to SoFi's common stock upon any conversion of the notes."
Long story short, while seeing a company take on new debt -- and particularly convertible debt -- can sometimes upset investors, in this particular instance, it's possible the news isn't as bad as it seems. With SoFi now on track to report its first profitable year in 2024 ($0.07 per share in profits are predicted) and grow those earnings strongly in future years, long-term investors might want to look at today's short-term sell-off as a potential buying opportunity.
