Shares of Wolfspeed (WOLF -12.92%) ripped higher today after the silicon carbide power-chip maker completed its court-supervised restructuring and emerged from Chapter 11 protection. The rally reflects relief that the balance sheet is now delevered and that the company can refocus on core silicon carbide capacity and key customers. Shares rose as much as 54.2% but were up about 48% as of this writing.
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Bankruptcy exit resets the balance sheet
Management indicated the restructuring reduced total debt materially and cut annual cash interest expense while extending maturities. Specifically, the company's total debt has been reduced by 70%, and maturities have been extended to 2023. Overall, the company lowered its cash interest expense by about 60%. This eases liquidity pressure that had weighed on operations earlier this year.
Additionally, the emergence from bankruptcy canceled legacy common stock and issued new shares -- largely to creditors -- resulting in a smaller public float. A tighter float can magnify price moves on heavy volume, which accounts for the outsize jump.
Execution is key
After today's spike, investors are paying up for a cleaner balance sheet and the option that Wolfspeed can execute on its silicon carbide expansion as electric vehicle, industrial, and energy markets recover. That said, the reset as part of this bankruptcy exit also means legacy holders were heavily diluted, and the company still needs to move toward sustainable profitability -- so traditional valuation measures like the price-to-earnings multiple are not yet meaningful. Execution on factory ramp-ups, yields, and customer increases will matter more than ever from here.
