Solar wafer and module manufacturer ReneSola yesterday became the first Chinese company to issue a convertible bond this year with a $175 million seven-year deal that priced after the US market closed on Wednesday.
The offering, which was arranged by Barclays Capital and Credit Suisse, also broke the near-two-month dry-spell of CB issuance by Asia-based companies and the fact that it went well should encourage other potential issuers, CB bankers said.
Indeed, less than 24 hours later, Singapore-listed CapitaMall Trust raised $197 million from a sale of Singapore-denominated three-year CBs that was also arranged by Credit Suisse. In addition to being quite small, neither deal was priced too aggressively, which helped ensure a good take-up from investors who were hungry for paper.
ReneSola, which is listed in the US, had pondered issuing a renminbi-denominated bond, but, given the volatility in the solar power sector, the bookrunners felt the CB market would be more receptive — a decision that was validated after fellow Chinese solar power play LDK Solar sold a synthetic renminbi bond in late February that performed poorly in the secondary market. LDK’s Rmb1.2 billion offering was the first high-yield bond issued by an Asian solar power company.
CBs are significantly more common in the sector, with most Chinese solar power companies listed in the US having issued one. However, the most recent deal – a $120 million five-put-three offering by Trina Solar – came before the financial crisis, in July 2008, so investors were keen for something new to add to their portfolios.
ReneSola’s CB was about two-and-a-half times covered and was indicated slightly above par in the grey market ahead of the US opening last night. The offering included a $25 million overallotment option, which could increase the final deal size to $200 million. Because of limited stock borrow and the volatility in the sector in general, about 75% to 80% of the deal was bought by outright investors, including existing shareholders who saw an opportunity to increase their exposure following a sharp drop in the share price during the past few weeks.
However, the share price held up well during the marketing of the bond, falling only 2.8% during the Wednesday trading session — a modest move in the solar power sector, where it isn’t uncommon for share prices to fluctuate two or three times as much as that in a single session. As per the usual practice in the US market, the CB was announced after the close of trading on Tuesday and marketed against a live price during Wednesday’s session.
The deal was marketed with a coupon/yield between 3.625% and 4.125%, and a conversion premium ranging from 20% to 25% over Wednesday’s close. The coupon was fixed at the wide end, but good demand allowed the bookrunners to push the premium inside the range to 22.5% for a conversion price of $10.55. The bonds are convertible into ReneSola’s US-listed ADRs, which each account for two common shares.
While ReneSola opted for a CB, it wanted the deal to be as debt-like as possible, as evidenced by the fact that the deal has no issuer call even though it is a seven-year deal with a five-year put. To limit the dilution if the bonds do convert, the deal also came with a call-spread overlay. The call spread, which was arranged by Credit Suisse, effectively increases the conversion premium for the issuer to 75%. ReneSola achieved this by buying a call option from Credit Suisse to buy shares at a 22.5% premium, while selling an option to sell shares at a 75% premium. ReneSola will use about 15% of the proceeds to pay for the call spread, while the rest will be used to fund an expansion of its production capacity of polysilicon — an area that the company has only recently started to expand into.
The call spread also adds some synthetic hedging capability as Credit Suisse, which needs to stay long shares, was offering an opportunity for the CB investors to go short. This helped push down the stock borrow cost from about 4% to 1%, or even lower. Call-spread overlays are common in the US market, but so far have only been used on four other CBs issued by Asia-based companies. Credit Suisse has been involved in three of those, including two separate CBs for Indonesia’s Bumi Resources that were sold in 2009.
The ReneSola CB was marketed at a credit spread of 700bp and with a full dividend pass-though, which at the final terms resulted in a bond floor of just over 78%. At a 4% stock borrow cost, the implied volatility worked out at 30.4%, according to a source, while at a 1% borrow cost it would fall below 20%.
US investors bought most of the deal, although a few accounts from Europe and Asia did participate as well. More than 50 investors were said to have submitted orders.
ReneSola’s share price has dipped 22% since the company released its fourth-quarter earnings on March 1, including a 16.7% drop the very next day. The earnings were in line with analyst forecasts and a doubling in revenues allowed it to report a $61 million profit, which was a significant improvement from a loss of $28 million a year earlier. Wafer and solar module shipments grew 72% from the fourth quarter 2009.
However, investors chose to focus on the fact that the first-quarter revenue guidance was below expectations. ReneSola is currently trading 40% below its 2010 high of $14.55, which it reached in mid-October, and 69% below its all-time high of $27.80, which it hit some four months after its US listing in January 2008.