New rules enable Gintech to complete GDR sale

Gintech Energy Corp on Tuesday raised $53 million from the sale of global depositary receipts, becoming the first Asian issuer to sell GDRs this year and the first to make use of new Taiwanese regulations allowing equity follow-ons to be priced at a wider discount than 10%.

The Taiwanese solar cell manufacturer did an international roadshow in September last year, but the market collapse following the Lehman Brothers bankruptcy made it impossible to launch a deal at the time and the company had been waiting to issue ever since.

A window finally opened up a few weeks ago when the Taiwanese regulator changed its rules to allow the maximum discount on follow-ons to be set as wide as 20%, thus increasing the likelihood that companies will be able to find buyers in the current volatile environment. Like before, the discount can be calculated either based on the latest closing price or based on a volume-weighted average price over the past one, three or five days, giving the issuer a bit of extra leeway.

Sources say it would have been impossible for Gintech to sell shares to an international audience at a discount of just 10% as sentiment towards the solar power sector remains quite poor. The drop in oil prices has led to a decline in demand for solar energy which in turn has resulted in falling selling prices throughout the value chain and Gintech, which relies heavily on long-term contracts for its raw material polysilicon and silicon wafers, has been among the worst hit in terms of margin compression -- even though most industry watchers agree that it is fundamentally a good company. Ironically, this very practice of securing wafer supplies for the long-term has previously been lauded by analysts as one of Gintech's most attractive features and the key reason why it has been able to grow so quickly since it began volume production in 2006.

At a close to 20% discount versus Wednesday's close in the Taiwan market, the company was, however, able to complement the orders from investors who are genuinely interested in the company for the long term with some hedge fund buying to ensure a sufficient take-up of the deal.

The company offered the same number of GDRs that it had planned to sell in September, namely 300 million (each equivalent to one common share), but with the share price having slumped significantly since then, Tuesday's sale was able to raise only about one-third of the money targeted when it did the roadshow. However, sources say the company wanted to go ahead in any case since it needed the money to pay down debt.

The GDRs, which together accounted for 20% of the existing share capital, were priced at $1.76 apiece, which corresponds to NT$60.51, or a 19% discount versus Tuesday's closing price of NT$74.70. While it may have been necessary to get the deal out the door after it has been parked on the sidelines for so long, the discount is definitely very wide, especially for a deal that is barely above $50 million and accounts for only five or six days worth of trading volumes. One cannot help but suspect that some investors may have decided to exploit the relaxed rules and push for the maximum discount in order to make a quick profit.

About 20 investors were said to have participated in the trade. Most of the demand came from Asia-based investors, about one-third from the US and a small amount from Europe. Sources say the deal did attract orders from some long-only investors, including a few alternative energy specialist funds, who had met the company during the September roadshow, but about half of the demand - both in terms of volumes and number of investors - was taken up by hedge funds.

One observer noted that some long-only funds may have been prevented from participating, under their statutes, since the GDRs will not be listed. While the idea of doing a GDR in the first place would have been to increase the international shareholder base, the fact that the counter won't be listed suggests that there is an expectation that most of the paper will be converted into more liquid Taiwan shares anyway - and once that happens it will be easy to sell them.

In addition to the shares targeted at international investors, a portion of the deal was allocated to existing domestic shareholders and employees of the company - a new requirement put in place by the regulators as part of the widening of the maximum discount. The intention is to make sure that domestic investors, many of whom are retail investors, don't automatically get hit by a dilution of up to 20%, but at least have the choice to participate. Under the new rules they have the right to subscribe for however many shares are needed to lift their holdings by the same percentage as the increase in the overall share capital. In the case of Gintech, this meant they could subscribe for an amount equal to 20% of their existing holdings.

The sources say the actual subscription from these investors was a lot larger that their entitlements and in terms of final allocation, about 2% of the deal went to existing shareholders and another 5.9% to employees. 

Interestingly, it was Goldman Sachs who led the GDR sale yesterday and not Royal Bank of Scotland and UBS, who took Gintech on the road in September. People familiar with the situation say the two banks were still in the picture when the discount rules were relaxed, but didn't feel comfortable doing the trade since they were concerned the smaller deal size wouldn't be sufficient to ensure that the company would not be in breech of certain covenants on its outstanding loans in six months' time.

That concern would stem from the fact Gintech was actually in breech, particularly of a requirement that its net debt to equity ratio was not to fall below 100% in 2008, and had to seek waivers from the lenders that they wouldn't call the loans before the next "check-up" date.

A source close to the deal says the $53 million raised would go primarily to pay down debt, and added that the company has also renegotiated some of the loan covenants and obtained some concessions from the banks, including a deferral of principal payments that will allow it to preserve a bit more cash. Altogether, Gintech's net debt to equity ratio will fall to 93% as a result of the deal from about 120% at present. The next check-up date will be at the end of August, the same source says.

The company has also supposedly renegotiated the price on some of its long-term wafer supply contracts, which will result in it being able to delay part of its earlier agreed pre-payments. However, according to analysts, the renegotiation of a 10-year contract with its main supplier, MEMC, which is also a shareholder in the company, has resulted not in a smaller outlay overall, but in the company getting more wafers for the same price - i.e. the per unit price will be lower, but the amount of cash going out the door is the same. MEMC is expected to provide about 50% of the company's total supply of wafers in 2009. 

Another concern related to the smaller deal size is the fact that it will bring in virtually no new funds to expand capacity. And that is a worry since the main way for solar cell manufacturers to grow is to expand their capacity and sell more. Gintech in January decided to halt plans to build a third fabrication plant and maintain its capacity at the current 660MW, with an output of about 350MW-400MW. One recent analyst report said the company is instead expected to expand its exiting Fab 2 in the second half of this year, if demand for its products returns.

Gintech's share price gained in early trading yesterday, but finished the session 1.5% lower at NT$73.60 - a strong outcome by any means after it just diluted its share capital by 20%. However, the GDRs won't be eligible for sale until the trade settles tomorrow and it will take at least until mid-next week before any of them will have been converted into common shares that can be sold in the Taiwan market.