Why Is Wolfspeed Stock Soaring Today?
Key Points
Volatility continues for Wolfspeed stock after its emergence from Chapter 11 protection late last month.
The restructuring allowed Wolfspeed to slash its total debt by 70% and debt payments by 60%.
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Shares of Wolfspeed (NYSE: WOLF) are jumping on Wednesday, up 11.1% as of 2:04 p.m. E.T. The spike comes as the S&P 500 and Nasdaq Composite gained 0.5% and 0.9%, respectively.
The embattled chipmaker exited Chapter 11 protection after successfully negotiating a plan with its creditors to reduce its suffocating debt load significantly. While this allowed the company to survive, it also meant existing shareholders were massively diluted.
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Wolfspeed's new stock is finding its footing
Key to its restructuring was the cancellation and delisting of existing shares and the issuance of new stock, which the company executed in late September. Those who held its common stock were only given roughly 5% of new shares, while the company's creditors received the lion's share.
Buyer beware
The event was a clear illustration of just how important it is to read the fine print when investing, especially for a company in or nearing bankruptcy. In a Form 8-K filed with the SEC before the stock was reissued, Wolfspeed warned investors: "Wolfspeed expects that its equity holders may experience a significant loss on their investment." That's exactly what happened.
The dilution is likely to continue; alongside shares of the new stock, warrants were issued to creditors as part of the restructuring, and note holders will convert these into stock and sell them to recoup as much of their investments as possible.
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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool recommends Wolfspeed. The Motley Fool has a disclosure policy.
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