Since the early 1990s, Intel Corp. has enjoyed healthy cash balances and strong cash flow generation, requiring the company to issue almost no debt. In fact, in recent years Intel has financed billions worth of stock buybacks entirely from operational cash flows. So, when its bankers at JPMorgan Chase approached it with a proposal to use inexpensive debt to finance stock buybacks, executives expected to give it a pass. But Intel's treasury saw an opportunity to structure a convertible contingent debt offering that could create a positive net present value (NPV) under most circumstances, while exposing the company to minimal stock price risk. The centerpiece was an IRS ruling on contingent interest debt payments and precedent transactions that allowed Intel to claim a tax deduction based on the "comparable yield" of a fixed-rate, non-convertible debt instrument. A portion of the proceeds was used to buy enough shares as a hedge, in the event of a conversion that required shares to be issued. "Others looked at raising cash for buybacks, but we looked at this as a pure NPV transaction," says Intel Treasurer Ravi Jacob. "We want to do smart transactions based on the strength of our balance sheet and our name that will add value for our shareholders."

Treasury made numerous changes to the proposal. They reduced the "break-even" stock price–a worst-case scenario in which the company would have to repay the IRS taxes on the difference between the bond's adjusted issue price and conversion value at termination–from $18 to below $10. The maturity of the issue was also lengthened to 30 years. Last December, the $1.6 billion debt issue was heavily oversubscribed during pricing and a steady stock price allowed the company to buy back shares with zero premium. Intel estimates the NPV of the deal to be between 20% and 25% of face value.