Intel will bring in other capital holders to help with fab expansion

[Xebec]

Source: Dr. Ian Cuttress on Twitter

https://twitter.com/x/status/1562041010913517569

Intel announces Investment Program with Brookfield Asset Management to provide Intel with a pool of capital for manufacturing buildouts. Agreement terms, the companies will jointly invest $30B into expansion in Arizona: Intel 51%, Brookfield 49%.

 

[hist78]

Source: Dr. Ian Cuttress on Twitter

https://twitter.com/x/status/1562041010913517569

Intel announces Investment Program with Brookfield Asset Management to provide Intel with a pool of capital for manufacturing buildouts. Agreement terms, the companies will jointly invest $30B into expansion in Arizona: Intel 51%, Brookfield 49%.

View attachment 873

It's a bad indication that Intel is in a very serious financial trouble. From previous announcement and today's news, this so called Semiconductor Co-Investment Program (SCIP) is a fancy term Intel created to hide a more commonly used term: lease back financing.

Intel's second quarter free cash flow already ran into negative and this is one of several methods Intel adopted to improve its liquidity problems.

The price that Intel is going to pay under this lease back program (or some other similar arrangements) won't be cheap.

 

[hist78]

OMG, Intel is basically borrowing money to maintain and increase its ability to pay dividends. This is wrong and this is bad.

Intel Introduces First-of-its-Kind Semiconductor Co-Investment Program

Intel signs agreement with Brookfield to jointly invest up to $30 billion in leading-edge chip factories in Arizona.

www.intel.com

"Benefits of the Transaction

Intel’s partnership with Brookfield is expected to enhance the company’s strong balance sheet by allowing Intel to tap into a new pool of capital below its cost of equity while protecting its cash and debt capacity for future investments and continuing to fund a healthy and growing dividend. Over the next several years, the structure is expected to provide a $15 billion cumulative benefit to Intel’s adjusted free cash flow and is expected to be accretive to Intel’s earnings per share during the construction and ramp phase. SCIP provides Intel the ability to replicate the co-investment model with other partners for other build-outs globally."

 

[lilo777]

It's a bad indication that Intel is in a very serious financial trouble. From previous announcement and today's news, this so called Semiconductor Co-Investment Program (SCIP) is a fancy term Intel created to hide a more commonly used term: lease back financing.

Intel's second quarter free cash flow already ran into negative and this is one of several methods Intel adopted to improve its liquidity problems.

The price that Intel is going to pay under this lease back program (or some other similar arrangements) won't be cheap.

Why exactly is it bad? It was obvious that Intel was not in a position to build all those FABs in such short time using just their cash flow (I am not sure any company would be able to do it). They had to borrow money and they did.

 

[nghanayem]

Why exactly is it bad? It was obvious that Intel was not in a position to build all those FABs in such short time using just their cash flow (I am not sure any company would be able to do it). They had to borrow money and they did.

The big concern for me is that long term not owning the whole fab reduces future profitability. Of course it might not matter because those extra fabs, even at half revenue, might just make their money back much faster due to only having to pay for part of the fab and not having to pay interest on that debt. What would be interesting would be if intel could buy back its shares in the future.

 

[nghanayem]

OMG, Intel is basically borrowing money to maintain and increase its ability to pay dividends. This is wrong and this is bad.

Intel Introduces First-of-its-Kind Semiconductor Co-Investment Program

Intel signs agreement with Brookfield to jointly invest up to $30 billion in leading-edge chip factories in Arizona.

www.intel.com

"Benefits of the Transaction

Intel’s partnership with Brookfield is expected to enhance the company’s strong balance sheet by allowing Intel to tap into a new pool of capital below its cost of equity while protecting its cash and debt capacity for future investments and continuing to fund a healthy and growing dividend. Over the next several years, the structure is expected to provide a $15 billion cumulative benefit to Intel’s adjusted free cash flow and is expected to be accretive to Intel’s earnings per share during the construction and ramp phase. SCIP provides Intel the ability to replicate the co-investment model with other partners for other build-outs globally."

So would you recommend they axe their dividend so that their stock can crater to 30% of its current value? Because if that happened they would not be able to borrow money for new nodes and fabs. As backwards as it may sound I think those dividends are the best way for intel to finance its expansion.

 

[hist78]

TSMC is doing $100 billion (2021 to 2023) fab expansion by using its cash flow and corporate bonds. Such scale is much bigger than what Intel Capex projected

The price Intel is going to pay for such lease back program won't be cheap and typically higher than issuing bonds. The possible reasons that Intel chose higher cost lease back program instead of issuing bonds might not be pretty.

On the other hand, I think Intel should use its precious cash, especially those borrowed money, in fab construction and research and development instead of paying more dividends.

 

[hist78]

So would you recommend they axe their dividend so that their stock can crater to 30% of its current value? Because if that happened they would not be able to borrow money for new nodes and fabs. As backwards as it may sound I think those dividends are the best way for intel to finance its expansion.

Once upon a time, there was a prestigious company that tried hard to maintain or even increase its dividends. Sometimes it required the company to borrow money to pay for it.

That company convinced Warren Buffett to invest into their stocks. At its peak Berkshire Hathaway owned $12 billion worth of stocks in that company.

That company is IBM.

And Mr. Buffett had dumped all his IBM holdings by 2018.

 

[nghanayem]

Once upon a time, there was a prestigious company that tried hard to maintain or even increase its dividends. Sometimes it required the company to borrow money to pay for it.

That company convinced Warren Buffett to invest into their stocks. At its peak Berkshire Hathaway owned $12 billion worth of stocks in that company.

That company is IBM.

And Mr. Buffett had dumped all his IBM holdings by 2018.

I never claimed it was desirable or pretty. My point was if intel had no dividend their stock would crater. If it cratered they could not be able to get a loans, and without capital intel might as well rollover like GF did (a fate even worse than IBM).

 

[hist78]

I never claimed it was desirable or pretty. My point was if intel had no dividend their stock would crater. If it cratered they could not be able to get a loans, and without capital intel might as well rollover like GF did (a fate even worse than IBM).

Yes, it's a tough situation Intel got itself into. But Intel's stock prices may or may not relate to its loan or bonds. It all depends on the terms of the contract.

On the other hand if Pat Gelsinger is looking for Chips Act 2.0 in the near future, he better stops the Intel dividends ASAP. Otherwise how can he convince American people that Intel desperately needs additional financial help?

 

[Daniel Nenni]

Sounds good to me:

The partnership is expected to enhance Intel's balance sheet with a new pool of capital that is below its cost of equity (~8.5%) and above its cost of debt (~4.5%). We are estimating it's near the midpoint of ~6.5%. As stated at the February Investor Day, Intel has assumed that capital offsets from government support, customer participation, and private investment would offset 5-yr expected capital spending by at least 10%, with upside to 20-30%, which now appears more likely. For example, Intel expects offsets in CY22 to be >10%.

The funding reduces upfront CapEx by ~$15bn and enables cash flow break even earlier than the traditional model. Accordingly, adjusted FCF will be $15bn higher and EPS will be accretive during the investment phase, while also protecting cash/debt capacity for future investments and the dividend. In return, Intel will need to provide cash outflows to Brookfield at the ~6.5% rate over the life of the project.

 

[nghanayem]

Yes, it's a tough situation Intel got itself into. But Intel's stock prices may or may not relate to its loan or bonds. It all depends on the terms of the contract.

On the other hand if Pat Gelsinger is looking for Chips Act 2.0 in the near future, he better stops the Intel dividends ASAP. Otherwise how can he convince American people that Intel desperately needs additional financial help?

I was more so referencing the fact that lenders are less generous with loan amounts and terms for companies that have their stock price declining. Just like how a waitress cannot get a loan to buy a $2mil house, lenders will not give money for intel to fund it's business developments if the company is not valuable (ie. it's stock price is poor).

 

[VCT]

Sounds good to me:

The partnership is expected to enhance Intel's balance sheet with a new pool of capital that is below its cost of equity (~8.5%) and above its cost of debt (~4.5%). We are estimating it's near the midpoint of ~6.5%.

Current TSMC 5Y bond rate is 4.375% and 10Y bond rate is 4.625%。

 

[hist78]

Current TSMC 5Y bond rate is 4.375% and 10Y bond rate is 4.625%。

Depending on the target market ( domestic or overseas) and currency types (US$ or NT$), recent TSMC corporate bonds rate can be as low as 1.6% (4years) ~ 1.95% (10 years).

Source: https://investor.tsmc.com/english/credit-rating

 

[VCT]

Depending on the target market ( domestic or overseas) and currency types (US$ or NT$), recent TSMC corporate bonds rate can be as low as 1.6% (4years) ~ 1.95% (10 years).

Source: https://investor.tsmc.com/english/credit-rating

Yes, different currency have different interest rate.

 

[lilo777]

Depending on the target market ( domestic or overseas) and currency types (US$ or NT$), recent TSMC corporate bonds rate can be as low as 1.6% (4years) ~ 1.95% (10 years).

Source: https://investor.tsmc.com/english/credit-rating

The way I see it, the rate is important but it is much less important than the strategy and execution. If Intel manages to execute well and develop their foundry business they will end up the winners. If not...

 

[benb]

So many thoughts:
- Brookfield is Canadian, the debt will be paid in foreign currency, maybe there is an arbitrage of some kind
- Maybe a way to repatriate Intel foreign earnings (Ireland, Israel) with an offsetting foreign debt
- $15B is a lot, Brookfield isn't issuing stock, so who are the private fish in this "pool of capital"? Russian fish?
- Securitized debt has many terms and conditions that affect Intel daily fab operations and Intel management isn't fully in charge (although it's not equity, they aren't getting 49% of the revenue, only P&I)
- It's a nightmare, simple things, moving tools, upgrading tools in a way that removes part of a tool, (commonplace things) just can't be done under the terms. Terms that ensure the debt holder has good security and can't be leveraged. 100% pure nightmare.
- Everything has to go perfectly, which of course it doesn't, and when you can't pay the debt, you can't operate the fab because title to the tools will change. The name for this is debt trap financing.

 

[nghanayem]

The way I see it, the rate is important but it is much less important than the strategy and execution. If Intel manages to execute well and develop their foundry business they will end up the winners. If not...

I would not underestimate the value of cash. The best engineers in the world mean little if they can't get the resources they need for process refinement, or if a completed node is not ramped. As is, TSMC can focus the entirety of their budget on fab as well as having much higher margins. With TSMC having a much larger capex spend than intel, being able to offset half of the initial cost can narrow the capex gap. Unfortunately that comes at the cost of long term profits from their fabs, but if that is what is required for intel to ramp to the scales they need to be cost competitive (something intel's fabs have been struggling with and will struggle harder with if wafers need to be sold to external customers)/build more fabs from the same amount of investment capital, than it seems like a wise move.

 

[nghanayem]

So many thoughts:
- Brookfield is Canadian, the debt will be paid in foreign currency, maybe there is an arbitrage of some kind
- Maybe a way to repatriate Intel foreign earnings (Ireland, Israel) with an offsetting foreign debt
- $15B is a lot, Brookfield isn't issuing stock, so who are the private fish in this "pool of capital"? Russian fish?
- Securitized debt has many terms and conditions that affect Intel daily fab operations and Intel management isn't fully in charge (although it's not equity, they aren't getting 49% of the revenue, only P&I)
- It's a nightmare, simple things, moving tools, upgrading tools in a way that removes part of a tool, (F!8&ing commonplace things) just can't be done under the terms. Terms that ensure the debt holder has good security and can't be leveraged. 100% pure nightmare.
- Everything has to go perfectly, which of course it doesn't, and when you can't pay the debt, you can't operate the fab because title to the tools will change. The name for this is debt trap financing.

Isn't the last point only a problem if intel goes bankrupt? If this happens presumably intel has bigger problems than having half of a fab getting repo'd (ie selling off some of their fabs (going fab lite) or splitting into multiple companies).

 

[hist78]

So many thoughts:
- Brookfield is Canadian, the debt will be paid in foreign currency, maybe there is an arbitrage of some kind
- Maybe a way to repatriate Intel foreign earnings (Ireland, Israel) with an offsetting foreign debt
- $15B is a lot, Brookfield isn't issuing stock, so who are the private fish in this "pool of capital"? Russian fish?
- Securitized debt has many terms and conditions that affect Intel daily fab operations and Intel management isn't fully in charge (although it's not equity, they aren't getting 49% of the revenue, only P&I)
- It's a nightmare, simple things, moving tools, upgrading tools in a way that removes part of a tool, (F!8&ing commonplace things) just can't be done under the terms. Terms that ensure the debt holder has good security and can't be leveraged. 100% pure nightmare.
- Everything has to go perfectly, which of course it doesn't, and when you can't pay the debt, you can't operate the fab because title to the tools will change. The name for this is debt trap financing.

I know but not sure if I understand the full picture about why Intel's finance got into such situations.

1. This SCIP is basically a lease back financing program in disguise. Why Intel didn't choose the cheaper way (such as bond market ) to finance its fab construction? Is it because the financial institutions already told Intel the difficulty to go that route due to Intel's worsening finance?

2. SCIP won't be cheap. I suspect if Intel underestimated the true cost. During the Q2 earnings conference call, TSMC's CFO was asked about the lease back financing. His reply was TSMC won't do it because the high cost demanded by the lender.

3. In the news announcement Intel stated that this SCIP will let Intel to keep other financing capabilities (like corporate bonds) for future use. Does that mean Intel anticipates some serious financial issues coming in the near future?

4. Also in the Intel announcement, it said:

"allowing Intel to tap into a new pool of capital below its cost of equity while protecting its cash and debt capacity for future investments and continuing to fund a healthy and growing dividend. "

I don't have any clue on how Intel came out the first part of above quoted text: "below its cost of equity".

Additionally it seems scary to me Intel is borrowing money to pay dividends stated in the second part of the above quoted text:

"continuing to fund a healthy and growing dividend."

5. Brookfield is not a White Knight. They are in the business to make money, the more the better.