Follow-ons from Suntech Power and Sino-Forest

Suntech Power Holdings late last week became the first US-listed Asian issuer to sell new shares through a placement this year, following the example of a series of US companies over the past month. The solar cell and module manufacturer raised $250 million, which it will use partly for repurchases and redemptions of existing securities, including a put obligation on its outstanding convertible bonds due 2012, and partly for capital expenditure and working capital.

While the offering found enough buyers, existing shareholders weren't overly enthusiastic about the dilution and pushed Suntech's share price 15% lower on Thursday, while the deal was in the market. This arguably made the execution a bit more challenging for the bookrunners and more importantly netted the company significantly less money than if it had sold the shares just one day earlier. That wouldn't have been possible though since the company reported first-quarter earnings before the market opened on Thursday. The share placement was announced and launched shortly after the earnings release.

Toronto-listed Chinese forest plantation company Sino-Forest Corp, which was also in the market last week, chose a different approach by launching its fully bought follow-on after the market closed on Thursday and wrapping it up before opening on Friday, avoiding any risk that the reference price would fall during marketing. The Wuxi-based company, which counts Temasek as one of its substantial shareholders, also offered the shares at a fixed price, and thus knew exactly how much money it would raise.

Unfortunately for both issuers, they chose to come to market on a pretty weak day for US markets with the Dow Jones index dropping 1.5% on Thursday amid concerns about unemployment and fears that the US may lose its triple-A credit rating. The latter fears were stoked after Standard & Poor's lowered its outlook on the UK's triple-A rating to negative due to soaring debt levels. The Dow fell another 0.2% on Friday, bringing the total losses since Monday's strong session to 2.7%.

Up until this point though, May has been a record month for follow-on issuance in the US with $39.2 billion worth of new share sales so far, surpassing the previous monthly record of $26.1 billion in October 2008, according to Thomson Reuters. However, volumes are somewhat inflated by the "forced" capital raisings in the financial sector (43.9% of the total) with several major banks, including Wells Fargo, Morgan Stanley, US Bancorp and State Street, raising more than $1 billion of fresh capital each following the results of the government's "stress test".

Sino-Forest initially offered 26.5 million new shares at C$11 apiece for a total deal size of C$291.5 million ($256 million), but after the books closed, joint bookrunners Credit Suisse and Dundee Securities announced that they had agreed to buy a further 3.5 million shares and distribute them to investors. This increased the base size of the deal to C$330 million ($290 million). On top of that, the bookrunners also have an overallotment option to sell additional shares of up to 15% of the base offering.

The deal was driven mainly by existing shareholders, but the company also generated some independent interest as a result of an analyst call with investors.

While the price was guaranteed during the deal, Sino-Forest's share price too took a beating when the Toronto market opened on Friday. However, while it dropped 11.8% on the day, the stock never fell below the placement price of C$11 and finished the day at C$11.30. The C$11 placement price represented a 14.1% discount versus Thursday's close of C$12.81.

By comparison, Suntech's offering was priced at a 7.2% discount to Thursday's close of $13.47, but a full 21% below Wednesday's close of $15.83. The stock also fell a further 7.4% to $12.48 on Friday -- leaving it just blow the placement price of $12.50 and resulting in a sizeable two-day value deterioration for existing shareholders.

The deal comprised 20 million American depositary shares (each equal to one common share), or about 13% of the company, and includes an overallotment option of an additional 3 million shares, which could boost the final deal size to $287.5 million. UBS, Goldman Sachs and Deutsche Bank were joint bookrunners, but with split economics in favour of UBS.

Sources noted that the offering was supported by a lot of existing shareholders, with a fair number of new investors also joining in and the order book was described as "high quality". As usual on deals for US-listed issuers, the majority of the investors were US-based, although there was also good interest from Europe as well as some buyers from Asia.

Before the launch of this deal, Suntech's share price had rallied 200% from a low of $5.21 in early March, but its current share price levels in the mid- to low-teens are still well below the record $88 it fetched in December 2007. While that spike can be seen as a bit of an anomaly, the stock has hovered in a range between $30 and $50 for much of the past three years until concerns about economic growth and falling oil prices sent it plummeting in the fourth quarter last year.

The renewed optimism in recent months has partly to do with the announcement of new subsidies to support the usage of renewable energy that make up part of the stimulus packages in various countries, including China and the US.

Looking at the past few days specifically though, Suntech's first-quarter earnings may have contributed to the share price drop since revenues came in below expectations, and the company was light on specific forecasts for the second quarter. On the other hand, gross margins improved and its sales were better than for some of its competitors.

The addition of new equity capital should also help to address some of the concerns expressed by analysts about Suntech's rising debt levels. At the very least, the money should allow the company to continue to buy back its maiden five-year CB which was issued in 2007. As of the end of March this year, Suntech had repurchased an aggregate principal amount of $244.2 million worth of this 0.25% CBs due 2012 for a total consideration of $190.9 million. This leaves $255.8 million worth of principal outstanding. The bonds can be put back to the company in February 2012.

Meanwhile, Sino-Forest said it intends to use the proceeds from the share sale primarily for the acquisition of commercial plantation forests in Jiangxi Province. According to a release, the company is close to signing an agreement to buy between 15 million and 18 million cubic metres of wood fibre located in plantations in Jiangxi Province over a three-year period at a price not to exceed Rmb300 ($44) per cubic metre.

The company's main businesses include ownership and management of forest plantation trees, the sale of standing timber and wood logs, and the complementary manufacturing of downstream engineered-wood products.