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BlackBerry Debt Move: 5 Key Points

Summary

Company is redeeming its 6% notes, issuing new ones.

For upfront hit, interest will be saved over time.

Recent events may have influenced this move.

I was very surprised last Friday afternoon when shares of BlackBerry (NASDAQ:BBRY) were halted for pending news. Speculation soon began about what was to be announced, from the company potentially exiting its hardware business to perhaps even being acquired. It turned out that the company announced information regarding its convertible debt, paying back its outstanding notes while issuing new ones. For those that wonder what this all means, here are 5 key points.

Deleveraging the balance sheet:

When BlackBerry announced quarterly results back in June, the company took a sizable charge to write-down the value of its goodwill and intangible assets. As you can see in the image below, this had a significant impact across the company's balance sheet.

(Source: BlackBerry Q1 financials)

One of the biggest impacts was to the book value of equity, which dropped from over $3.2 billion to $2.55 billion. That meant that the company's debt to equity ratio jumped to almost 50%, and this might have worried management and or convertible note holders. By the company taking almost $650 million in long term debt off the books with this transaction, the debt to equity ratio will improve quite a bit.

Taking a one-time hit to save on interest:

There are no free rides in life, so BlackBerry wasn't going to get off that easily here. When you have debt with a 6% coupon in such a low interest rate environment, you're going to have to pay a premium to retire these notes. Noteholders are getting almost a 7% spread above par, which means BlackBerry will be recording a charge of around $84 million to retire its existing debt.

In essence, BlackBerry is taking a short term hit in exchange for a longer term gain. That payment above will reduce the cash balance, but the...


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