ja-solar-issues-350-million-cb-with-callspread-overlay

JA Solar issues $350 million CB with call-spread overlay

A concurrent equity offering that was aimed solely at creating synthetic borrow was priced at a 2.95% discount to the market price.
Chinese solar cell designer and manufacturer JA Solar has raised $350 million from a five-year convertible bond issue that was upsized from $300 million after strong demand from both CB specialist hedge funds and outright investors. The bonds were offered together with a concurrent placement of American depositary shares (ADS) that were sold with the sole purpose of being used as a hedging tool for the CB and resulted in no additional money for the company.

According to sources, the total demand for the bonds exceeded $1 billion. However, the company chose to increase the original size instead of trying to tighten the pricing and the final terms were fixed at the wide end of the indicated ranges. This gave a conversion premium of 32.5% and a coupon of 4.5%. The deal was initially offered with a conversion premium up to 37.5% while the coupon was indicated at 4% to 4.5%. Because the bonds are issued and redeemed at par, the coupon is also equal to the yield to maturity. The bonds have no put option, but can be called after three years, subject to a 130% hurdle.

The deal, which was priced after the New York close on Tuesday following a two-day bookbuild, has a greenshoe option of $50 million that could lift the total deal value to $400 million. There was no information available last night on the breakdown of the book or the number of investors who participated, except that the majority of the buyers were US accounts and included both hedge funds and outright long-only investors who bought the bonds primarily for the equity story.

Some CB specialists say the bonds were quite cheap û theoretical values between 103% and 103.8% were cited û and note that Suntech Power was able to achieve a coupon of 3% and a premium of 36% on its latest $500 million five-year CB that was issued mid-March when most equity markets were at their lowest point this year. Others argue that JA Solar is the first US-listed Asian issuer to bring a CB since LDK Solar completed a $400 million convertible in the second week of April that was not that well received. Consequently, investors may have needed an incentive to look at another deal in the same sector, they say.

However, the equity portion of the offering was priced at a discount of only 2.95% to TuesdayÆs closing price, which must be considered a good outcome û especially since the share price gained 0.7% from launch to pricing. Those gains did by no means come in a straight line though. In fact, the share price fell 6.1% on the first day of marketing as investors reacted to the CB offer, but then rallied 7.2% the following day as part of a sector-wide rebound after Canadian Solar released first quarter earnings that sharply exceeded expectations and issued a strong second quarter outlook. Canadian Solar itself, which makes solar modules and products and is active within recycling of silicon, soared 19.6% to a record high of $40.78.

The interest for JA SolarÆs bonds may have been partly due to a scarcity of CB issues on offer this year, but the company also had a strong first quarter (operationally) and its share price has recovered all of its earlier losses in a steep rally that began in mid-March. According to a source familiar with the transaction, Nasdaq-listed JA Solar is active in the part of the solar power value chain that is considered the most attractive right now, given the amount of technology value add that is introduced here and which is resulting both in higher profits and greater barriers to entry.

CB investors arenÆt prepared to put all their faith in the equity story of any company right now though, and many still wonÆt get involved with stocks where there isnÆt enough borrow available to allow them to hedge the equity option. As this would have been the case with JA Solar, joint bookrunners Credit Suisse and Lehman Brothers helped create synthetic borrow though the concurrent sale of JA Solar shares that they borrowed from the company. The sale created a short position on their own books that was then transferred to the CB investors through a total-return swap agreement. The structure is virtually identical to the one used in connection with a CB for Solarfun Power in January, which was arranged by Morgan Stanley.

Solarfun was the first Asian issuer to use a total-return swap to facilitate hedging of a CB, but the technique is quite common in the US.

JA Solar also pioneered a feature of its own, as it became the first Asian issuer to use a call-spread overlay on a CB. The feature essentially allowed the issuer to raise the conversion premium by 30 percentage points above the one agreed for the CB to 62.5% - a level which it obviously feels better corresponds to its own outlook for the share price. The higher premium also means the dilution as a result of the CB issue will be smaller. This was achieved by JA Solar buying a call option with a strike price corresponding to the initial conversion price from the bookrunners and selling an option with a strike price equal to a conversion price derived at using a 62.5% conversion premium to them. An added short-term benefit from these transactions is that Credit Suisse and Lehman will need to hedge their positions by buying additional shares in the market û thus providing a certain degree of support for the stock immediately after the deal. The borrowed shares will be returned to JA Solar when the bonds mature or have been converted.

Using Suntech PowerÆs credit spread of 650bp over Libor as guidance, the bookrunners indicated a credit spread of 750bp but, in line with common practice in the US, they didnÆt back this up with any asset swaps. Together with a stock borrow cost at 20bp-50bp and a full dividend pass-through (although the company currently doesnÆt pay dividends) CB specialists estimated the bond floor at 73%-75% and an implied volatility of about 33.5%. The latter compares with a 100-day volatility above 90%, again suggesting a good deal for investors.

The equity portion of the deal comprised approximately 6.59 million ADSs, which were priced at $23 versus a Tuesday close of $23.70. The conversion price on the CB was then fixed with reference to the ADS price, giving an actual conversion price of $30.475, which is above JA SolarÆs all-time closing high of $25.75 from mid-April. The share price exceeded that high overnight, however, as it gained as much as 9.7% at one point to reach $26. The stock retreated towards the end of the session though and closed 2% higher at $4.17.

Sources say the equity placement was also significantly oversubscribed and the bookrunners could easily have placed the full amount of the 10-11 million ADSs that they offered at launch. According to the prospectus, JA Solar was willing to lend up to 13.13 million shares towards the borrow facility. However, the final size of the offering was dictated by the demand for short positions needed to hedge the delta on the equity option of the CB. If the greenshoe is exercised, they may sell additional shares to make up for the difference though.

JA Solar said it expected to net $311 million from the CB sale, after deducting expenses and the cost of the call-spread overlay. It will use the money to expand its production capacity, which is the main way for solar power companies to grow; to make pre-payments for raw materials; and to enhance its research and development.

In connection with its first quarter earnings release on Monday, JA Solar reiterated its target to boost its annual capacity to 500MW by the end of this year and said it aims to produce at least 340MW worth of solar cells in 2008. The company reported a net profit of Rmb154.6 million ($22 million) for the first quarter, which represented a 165% gain from the first quarter 2007 and a 57% improvement from the fourth quarter.
¬ Haymarket Media Limited. All rights reserved.