With Advanced Micro Devices Inc.’s cash reserves dwindling and the chip maker’s overall financial health deteriorating to dangerous levels last year, the company was thrown a lifeline by Lehman Brothers, the investment bank now in bankruptcy.
The $1.5 billion in AMD debt that Lehman scooped up in August 2007 demonstrates the important role that banks like Lehman and other investment firms play in helping prop up wobbly companies by pouring money into them when they’re down.
The banks profit from the investment in so-called “convertible senior notes” through interest payments and the conversion of the debt into either cash or favorably priced shares delivered at some point in the future. Healthy companies also use the debt offerings to raise money on favorable terms to buy back stock or pay for other general expenses.
The Lehman-AMD deal is a snapshot of a common type of partnership that could be harder to come by with Lehman’s bankruptcy and the disintegration or consolidation of other banks.
In AMD’s case, Lehman’s problems won’t affect the Sunnyvale, Calif.-based company’s balance sheet, which at the end of June showed AMD holding about $1.6 billion in cash while carrying $5.3 billion in debt.
That’s because AMD has already spent the proceeds, and its debt offering was sold off by Lehman to other banks or held by its subsidiaries that are now being sold to other firms.
There were no clauses that required anything further of AMD other than paying interest on the investment and fulfilling the contracts when they reach their maturity date.
AMD declined to comment.
AMD used the cash infusion to pay down debt from its $5.6 billion acquisition of graphics chip maker ATI Technologies and for other corporate expenses.
Richard Lane, a fixed-income analyst with Moody’s Investors Services who follows the high-tech sector, said that in today’s environment, any company considering issuing long-term…