Neo Solar sells $120m CB

The Taiwanese solar power company is raising money to buy raw materials.
Neo Solar's headquarters in Hsinchu, Taiwan
Neo Solar's headquarters in Hsinchu, Taiwan

Taiwan’s biggest solar cell maker Neo Solar Power raised $120 million through a convertible bond on Thursday evening thanks to the support of ING, which provided a standby letter of credit to reassure investors.

The three-year deal offered no coupon and no yield, and a modest 10% conversion premium. The company said that it will use the proceeds to buy raw materials such as silicon wafers, which make up more than half the cost of solar cells.

Neo Solar faced a few challenges given difficult market conditions in Europe after Portugal’s Banco Espirito Santo group delayed payments on some of its debt, prompting a brief panic about the return of Europe’s banking problems. Taiwan’s benchmark share index closed down almost 1% on Friday as a result.

The deal was “well covered” nevertheless, according to a banker in Hong Kong, with more than 20 accounts buying into the deal, split evenly between outright CB buyers in Europe and hedge funds in Asia.

Neo Solar listed in Taiwan in 2009 and sold shares to international investors in 2011 for around NT$38 — or about three bucks more than the closing price on Thursday.

Investors (and ING) will be hoping that the stock performs better during the next three years.

The past few years have certainly been tough for most companies in the industry. Neo Solar’s sales slumped in 2011 and 2012 amid a global supply glut, but the business started to grow more strongly during the second half of last year after the completion of a merger with its smaller rival, DelSolar. Revenue is up more than 100% so far in 2014 — on target for a record year.

From September, Neo Solar’s share price doubled to end the year at NT$44, but the stock has traded within a NT$35 to NT$40 range more recently, despite record monthly revenue increases. This is partly due to an upcoming US anti-dumping ruling on July 24, which will likely lead to punitive duties on Taiwanese solar cells. June sales were down 15% as a result.

The anti-dumping action is part of a game of cat and mouse with Chinese solar manufacturers. The US imposed steep tariffs on solar cells from China in 2012, which pushed production to Taiwan, where local solar cells could be incorporated with Chinese modules and exported at low cost.

Market research firm IHS said in a recent report that these units sell for as little as $0.62 a watt, compared to prices of more than $0.70 from non-Chinese suppliers.

If new duties are imposed on Taiwanese cells, Chinese manufacturers will probably have to further reduce their margins and offer more generous financing options to keep customers. Some production will probably also move to Mexico, where the North American free-trade agreement offers preferential access to the US.

The pricing on the CB certainly reflected some sensitivity, with the conversion premium coming in at the bottom end of the 10% to 15% range to give a strike price of NT$39.05.

The credit portion of the deal was particularly attractive thanks to the letter of credit from ING. The A-rated Dutch bank’s credit trades at around 30bp over Libor but the deal assumed a credit spread of 125bp. Implied volatility was priced at 16% to 18% and the bond floor was calculated at 96%.

Investors also had the opportunity to play the currency as the deal is settled in US dollars.

Daiwa and ING were joint bookrunners.

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