A Chips Act cautionary tale

Good morning. Sujeet here, subbing for Rob and Aiden. It is good to make another cameo at Unhedged today, this time on US Income Tax Day (big shout-out to the five of you who actually sent a return to the empty IRS building in Washington). Email me your itemised deductions: sujeet.indap@ft.com.

Wolfspeed

There are many, so many hungry wolves . . . Can you find the wolves in this picture? — Leonardo DiCaprio as Ernest Burkhart in Killers of the Flower Moon 

The prize for one company navigating a knife’s edge balance sheet restructuring? A seat at the table with Donald Trump, and a chance to cut one last deal.

I write a lot about distressed debt and Chapter 11 bankruptcy fights. And a few weeks ago, I came across one of the most interesting I have ever encountered. The creditors are a motley crew, and the underlying question — one touching every global market right now — is why and when governments should pick private sector winners and losers.

Wolfspeed is a North Carolina-based semiconductor manufacturer with a market cap of under $400mn and $6.5bn of long-term debt. That debt pile includes, most problematically, a $575mn convertible bond that comes due in May of next year. Today that convert trades at about 50 cents on the dollar.

At the top end of Wolfspeed’s capital stack sits a group led by the mega-asset manager Apollo. That group holds a $1.5bn senior secured loan due in 2030 with an effective 16 per cent interest rate. The loan also includes a covenant requiring Wolfspeed not to allow its cash balance, currently at $1.4bn, to fall below $750mn. There are two other large Wolfspeed convertibles due in 2028 and 2029.

The Trump angle starts with Joe Biden, whose 2022 Chips and Science Act called for about $50bn to be invested in the domestic semiconductor industry. While the likes of Intel and TSMC have got the most money and attention, niche players such as Wolfspeed are just as intriguing.

Wolfspeed’s predecessor company, Cree, specialised in silicon carbide wafers originally used in LEDs. In recent years Cree pivoted to silicon carbide wafers for industrial settings, most prominently drivetrains and charging systems for electric vehicles. With that switch in focus, Cree rebranded itself Wolfspeed in October 2021. The heavy borrowing was to fund three multibillion-dollar fabrication plants in the US with the expectation of booming EV production.

Two bad things have happened since. First, interest rates have jumped. The three convertible bonds have modest coupons between 0.25 per cent and 1.9 per cent. If Wolfspeed refinances, those rates will rise dramatically. Second, EV adoption has stalled amid high sticker prices, a softening economy and reduced subsidies. Chart below from the US Energy Information Administration:

While Biden was still president last October, after months of negotiations, Wolfspeed announced a $2.5bn financing with the federal government at the centre. The Chips Act would commit $750mn to Wolfspeed with the Apollo senior lender group to put in an additional $750mn, and the other $1bn was to come from “Section 48D” tax credits. For its part, Wolfspeed had to satisfy three conditions to unlock the money: raise external equity (it has since sold $200mn worth of new shares), finish the buildout of a particular fab (basically done) and resolve the 2026 maturity (still working on it so remains a wild card). The company insists that it is very close to $1bn in annual revenue, a run-rate good enough to generate positive cash flow.

Three weeks after this October announcement, the Democrats lost the election, and the winner is not enthusiastic about the Biden agenda. Apollo has funded $250mn of its $750mn commitment. But the largest holders of the 2026 convertible, the hedge funds Shaolin Capital Management and Balyasny Asset Management have, understandably, been playing hardball. They have leverage: while the Apollo loan due 2030 is secured and senior, the unsecured junior converts have so-called temporal priority since their maturities are inside 2030.

A few weeks ago, Wolfspeed put out an ominous press release, acknowledging that the Chips Act money had not come through yet, noting that the 2026 maturity was still unresolved — and adding a political plea. Wolfspeed wanted to “support the Trump administration’s efforts to reinforce US industrial leadership in semiconductors, secure domestic supply chains, and reshore the manufacturing of critical mineral derivatives, including semiconductor wafers”. The market was thoroughly spooked as the chart below shows.

People close to Wolfspeed say that Michael Grimes, the former Morgan Stanley banker now at the US commerce department, will stand by Wolfspeed even if the existing October 2024 term sheet falls through. But what should the rules be when the government wants to intervene in free markets?

One person in the senior lender group observed to me that the capital requirements across the EV value chain are so vast, and the pay-off so distant, that public subsidies are needed across the industry to catalyse private capital.

People close to the company, however, offered a more nuanced view. The Biden negotiations dragged on over taxpayers propping up a junk-rated company and in effect bailing out Wall Streeters like Apollo — a scenario that played out during the first Trump administration in another Apollo-funded company, YRC Worldwide, which received a $700mn government loan three years before filing for bankruptcy.

Since October, Wolfspeed’s near-term prospects have only deteriorated. The company has recently lost its longtime CEO and two newly-installed board members. One person close to Wolfspeed said the company had the opportunity to raise private sector capital a year ago when its debt was trading at par and its equity market capitalisation was $4bn, suggesting that there was no vast market failure that required government intervention. An activist investor last year implored Wolfspeed to sell itself to a deep-pocketed buyer who could absorb its cash needs.

Instead, Wolfspeed got caught up in the politics and bureaucracy of the Chips Act and a change of administration, and is now left (to switch from land to sea) swimming with the sharks. Ironically or not, its current financial adviser, Perella Weinberg Partners, had been the commerce department’s consultant during the 2024 back-and-forth.

Wolfspeed’s next quarterly report to the SEC is due in early May and the 2026 convertible maturity will be classified a “current liability”. “The Chips office kept moving the goalposts . . . We could have done a different transaction,” said the person I spoke to.

One good read

Two insomniac journalists have been the breakout stars of the tariff-driven market meltdown.    

FT Unhedged podcast

Can’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.