Wolfspeed Stock Soars 9%. A Court-Approved Plan Will Cut $4.6 Billion of Debt and Reduce Annual Interest Expense by Roughly 60%

Shares of Wolfspeed jumped over 9% on Wednesday. A court-approved plan will cut $4.6 billion of debt and reduce annual interest expense by roughly 60%, with emergence expected within weeks.

The chipmaker's stock, still battered and down more than 55% for the year, suddenly looks very different to investors after last week's announcement that it will soon exit Chapter 11 bankruptcy. It's still gaining on last week's news.

Wolfspeed will cut its debt by 70%

Last week, a bankruptcy court approved Wolfspeed's re-organization plan that will eliminate $4.6 billion in debt -- a 70% reduction -- while cutting annual interest expenses by 60%. With creditor support secured from more than 97% of senior note holders and two-thirds of convertible holders, the company anticipates emerging from bankruptcy within a matter of weeks.

Wolfspeed formally filed for Chapter 11 protection on June 30 after its mounting debt made it impossible to continue in the normal course of business.

Wolfspeed's debt reduction is big, but is it enough?

Wiping out the debt changes the picture for Wolfspeed, but it does not solve the company's underlying issues. Execution has been inconsistent, and the electric vehicle (EV) market, which is central to Wolfspeed's business, is facing its own slowdown.

A cleaner balance sheet gives Wolfspeed a chance to recover, and some investors willing to take on more risk might see potential here. Even so, I am skeptical that the company can secure and hold a meaningful share of the market. Coming out of bankruptcy helps, but it does not mean the turnaround will succeed.