|Actually SanDisk is going to make the following:|
Calculate present value of future cash flow of the bonds using a risk free discount rate applicable to SanDisk (~7.5%); result=~750M. This will be recorded as debt.
The remaining is actually equity. 1150-750=$400M will be recorded as equity.
8/10 debt 750 equity 400 total 1150
8/11 debt 750*1.075 equity 400-750*0.075
8/17 debt 1150 equity 0
Dan, I do not think you can have D=750MM and E=400 on the B/S as of 8/10. The whole amount will appear as LT Debt on Sandisk's B/S. There will be a similar increase in Cash+ M/S (less fees paid) and no change in Equity from this Conv Bond issue. We will have to wait for 3Q report for a confirmation but I am pretty sure about this.</d>
There are 2 types of convertible bonds:
1) Settlement in equity only
2) Settlement in equity and cash
In the past form 1 was more prevalent, but in the last 6 years form 2 has become much more popular
The SanDisk 2013 bonds 1% coupon and the SanDisk 2017 1.5% belong to group 2
The $75M bonds that came from MSYS (SanDisk retired these bonds in q2 10) were group 1
The accounting was the same for the two groups and as you described for both groups till 12/08
Since 1/09 the accounting has changed for group 2 to the way I've presented.
Just look at how SanDisk is presenting the 2013 bonds in their balance sheet from 1Q/09
FSP APB 14-1. The Company adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. APB 14-1 (“FSP APB 14-1”), Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 is effective for the Company’s $1.15 billion aggregate principal amount of 1% Senior Convertible Notes due 2013 (the “1% Notes due 2013”) and requires retrospective application for all periods presented. FSP APB 14-1 requires the issuer of convertible debt instruments with cash settlement features to separately account for the liability and equity components of the instrument.
As a result of the adoption of FSP APB 14-1, the Company has separately accounted for the liability and equity components of its 1% Notes due 2013. The Company calculated the value of the conversion component of the debt and recorded this value as a component of equity and a corresponding debt discount. The debt discount, which is a reduction to the carrying value of the debt, will be amortized as additional non-cash interest expense over the term of the original note. The retrospective application of this pronouncement affects years 2006 through 2013. Income taxes have been recorded on the foregoing adjustments to the extent tax benefits were available. See Note 2, “Financing Arrangements.”
The following table reflects the carrying value of the Company’s convertible debt as of March 29, 2009 and December 28, 2008 (in millions):
March 29, 2009 December 28, 2008
1% Notes due 2013 $ 1,150.0 $ 1,150.0
Less: Unamortized Interest Discount (257.7 ) (270.9 )
Net Carrying Amount of 1% Notes due 2013 892.3 879.1
1% Notes due 2035 75.0 75.0
Total convertible debt 967.3 954.1
Less: convertible short-term debt (75.0 ) —
Convertible long-term debt $ 892.3 $ 954.1
1% Convertible Senior Notes Due 2013. In May 2006, the Company issued and sold $1.15 billion in aggregate principal amount of the 1% Notes due 2013 at par. The 1% Notes due 2013 may be converted, under certain circumstances, based on an initial conversion rate of 12.1426 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $82.36 per share). The net proceeds to the Company from the offering of the 1% Notes due 2013 were $1.13 billion.
As discussed in Note 1, “Basis of Presentation — FSP APB 14-1,” the Company separately accounts for the liability and equity components of the 1% Notes due 2013. The principal amount of the liability component ($753.5 million as of the date of issuance) was recognized at the present value of its cash flows using a discount rate of 7.4%, the Company’s borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. The carrying value of the equity component was $241.9 million as of March 29, 2009 and December 28, 2008.
The following table presents the amount of interest cost recognized for the periods relating to both the contractual interest coupon and amortization of the discount on the liability component (in millions):
Three months ended
March 29, 2009 March 30, 2008
Contractual interest coupon $ 2.9 $ 2.9
Amortization of interest discount 13.2 12.3
Total interest cost recognized $ 16.1 $ 15.2
The remaining interest discount (equity component) of $257.7 million as of March 29, 2009 will be amortized over the remaining life of the 1% Notes due 2013 which is approximately 4.1 years.
Concurrent with the issuance of the 1% Notes due 2013, the Company sold warrants to acquire shares of its common stock at an exercise price of $95.03 per share. As of March 29, 2009, the warrants had an expected life of approximately 4.4 years and expire in August 2013. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis. As of March 29, 2009, the warrants had not been exercised and remain outstanding. In addition, counterparties agreed to sell to the Company up to approximately 14.0 million shares of its common stock, which is the number of shares initially issuable upon conversion of the 1% Notes due 2013 in full, at a conversion price of $82.36 per share. The convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 1% Notes due 2013 or the first day that none of the 1% Notes due 2013 remain outstanding due to conversion or otherwise. Settlement of the convertible bond hedge in net shares on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by it upon conversion of the 1% Notes due 2013. As of March 29, 2009, the Company had not purchased any shares under this convertible bond hedge agreement.