Ultra Clean Holdings Announces \$400 Million Convertible Senior Notes Offering

Key Points for Investors

• Ultra Clean Holdings, Inc. (Nasdaq: UCTT) intends to offer \$400 million in convertible senior notes due 2031 in a private placement to qualified institutional buyers.
• An additional \$60 million in notes may be issued if the initial purchasers exercise their option within 13 days of the initial issuance.
• Proceeds will be used to fund capped call transactions, repurchase up to \$40 million of common stock, pay down debt, and for general corporate purposes.
• Capped call transactions are intended to limit potential dilution from the notes’ conversion.
• The notes will mature on March 15, 2031, and are senior, unsecured obligations.
• Notes can be converted into cash and, if applicable, shares of UCTT common stock under specific conditions.
• Notes are redeemable at Ultra Clean’s option after March 20, 2029, if certain stock price thresholds are met.
• Share repurchases and capped call hedging transactions could significantly impact UCTT’s share price and trading volatility.

Detailed Analysis

Ultra Clean Holdings, Inc. has announced its intention to raise \$400 million through the issuance of convertible senior notes due 2031. The offering will be private, targeting qualified institutional buyers under Rule 144A of the Securities Act of 1933. There is also an option for the initial purchasers to buy an additional \$60 million in notes within 13 days of the original issuance.

Use of Proceeds

The company plans to allocate the net proceeds from the offering as follows:

• To fund the cost of entering into capped call transactions, which are designed to mitigate dilution and offset cash payments above principal upon conversion of the notes.
• To repurchase up to \$40 million of its common stock, likely in privately negotiated transactions at the closing price of the stock on the day of the notes’ pricing.
• To pay down a portion of its outstanding term loan under its amended and restated credit agreement, as well as for general corporate purposes and working capital.

If the additional notes are purchased, proceeds will similarly be used for more capped call transactions and the other purposes listed above.

Key Terms of the Notes

• Type: Senior, unsecured obligations.
• Interest: Payable semi-annually in arrears (exact rate to be determined at pricing).
• Maturity: March 15, 2031, unless earlier repurchased, redeemed, or converted.
• Conversion: Noteholders can convert under certain conditions and specified periods. Conversions will be settled in cash and, if applicable, shares of UCTT common stock.
• Redemption: Ultra Clean can redeem the notes for cash at its option after March 20, 2029, but only if the stock price exceeds 130% of the conversion price for a specified period and other conditions are met.
• Repurchase upon Fundamental Change: If a “fundamental change” occurs, noteholders can require Ultra Clean to repurchase the notes for cash at principal plus accrued interest.

Impactful Features for Shareholders

• Capped Call Transactions: These are complex derivative transactions that generally reduce potential dilution from note conversion and/or offset excess cash payments. However, if UCTT shares rise above the capped call price, dilution may still occur.
• Market Activity: The capped call counterparties may enter into derivative transactions or buy/sell UCTT shares to hedge their position. This activity could increase or reduce the share price and the price of the notes, especially around the time of pricing and during any early conversion or repurchase events.
• Share Repurchases: The planned buyback of up to \$40 million in UCTT stock (at the closing price on the pricing date) could support the share price near-term, potentially making the conversion price of the notes more favorable for existing shareholders by reducing dilution.
• Potential Volatility: Both the capped call hedging and the share repurchases may add to share price volatility around the time of the offering and in the future, particularly during conversion windows.

Important Considerations and Risks

• The notes and any shares issued upon conversion will not be registered under the Securities Act and can only be offered or sold under exemptions.
• The offering and its terms (including size, pricing, and use of proceeds) are subject to market conditions and may not be completed as described.
• Forward-looking statements in the announcement are subject to risks such as interest rate changes, stock price volatility, and broader market conditions, as well as risks specific to Ultra Clean Holdings’ business.

Conclusion

This proposed convertible note offering is a significant financial event for Ultra Clean Holdings. It combines a substantial capital raise, a targeted stock buyback, and sophisticated hedging strategies. These actions are likely to have a material impact on the company’s capital structure, debt profile, and potentially its share price in both the short and long term. Investors should closely monitor updates on the pricing and final terms of the offering, as well as follow-on effects from the hedging and repurchase activities.

Disclaimer: This article is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell securities. Investors should conduct their own research and consult their financial advisor before making any investment decisions. The information provided is based on the company’s public announcement and may be subject to change or updates.

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