Earnings

Wolfspeed Says Pentagon Loan Would Cut Cash Interest By About $100 Million A Year

The first $600 million tranche of a conditional $1.5 billion loan would refinance 2030 notes, the CFO told investors.

Matteo Parrino Jonathan Ponciano

Matteo Parrino, Jonathan Ponciano

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Wolfspeed Says Pentagon Loan Would Cut Cash Interest By About $100 Million A Year

Wolfspeed, which makes silicon carbide materials and power chips, expects the first $600 million tranche of a conditional $1.5 billion U.S. Department of War loan to cut its annual cash interest bill by about $100 million, CFO Gregor Van Issum said on the company's earnings call Wednesday. The company reported first-quarter revenue of $155 million on the same call.

Refinancing the costliest notes

Van Issum said the initial tranche, known as Tranche A, is expected to repay the remaining first-lien senior secured notes due in 2030. The refinancing is expected to deliver more than $50 million in annual interest savings. Because interest for the first five years would be paid in kind, he said, annual cash interest savings are expected to be approximately $100 million.

The move would finish a refinancing begun in March, when Wolfspeed cut its first-lien debt from $1.1 billion to roughly $630 million. CEO Robert Feurle said the new debt would mature in 2056.

Van Issum said the 30-year commitment is conditional and milestone-based.

Gallium nitride and the later tranches

Feurle said the remaining tranches could fund scaling of silicon carbide, domestic gallium nitride power devices, gallium nitride-on-silicon-carbide RF materials and radiation hardening. He added that "this is not a program to build additional size or square footage." Existing capacity, he said, can shift between silicon carbide and gallium nitride.

He named humanoid robotics and voltage step-down in data centers as the demand drivers for low-voltage gallium nitride.

Diligence, conditions and margins

Asked by a TD Cowen analyst what hurdles remain, Van Issum said the government needs "another couple of weeks" of diligence while the credit agreement is finalized. He said the company aims to close "ideally before end of the year." Drawing the tranches requires "limited equity rates, and other de-risking measures" on the balance sheet, which Wolfspeed is discussing with the U.S. government.

Adjusted gross margin was negative 12.8%, a 710 basis point improvement from the prior quarter. Van Issum said underutilized factories remain the main drag. Operating cash flow was negative $84 million, including $32 million of interest paid. Working-capital improvements have contributed about $235 million of cash over five quarters, and he said those efforts are largely complete.

For the second quarter, Wolfspeed targets revenue of $155 million to $175 million and expects adjusted gross margin to approach breakeven.

Wolfspeed's market value was $1.2 billion as of the report Wednesday, and the company's year-end target for closing the loan is its own hope, not a deadline.

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