Sunergy, a small-cap solar cell manufacturer which has been listed on Nasdaq since May 2007, sold $50 million worth of non-callable five-year CBs in a deal that was priced after the US market closed on Wednesday last week. The deal attracted more than $100 million of demand, which allowed the original offering of $45 million to be upsized.
However, one source says a lot of the demand came from hedge funds who wanted to ôtake a punt on the volatilityö rather than from investors who wanted it for the equity story, which may partially explain the 16.4% drop in SunergyÆs share price the day after the deal. To be fair, the entire market was under a lot of pressure that day with the Nasdaq Composite index falling 3.3%, but Sunergy clearly underperformed. It dropped a further 3.5% on Friday, which more than doubled the effective conversion premium of the CB to 48.6% from 20% at the time of pricing û thus significantly reducing the value of the bonds.
ôMost investors arenÆt buying at all at the moment and as soon as something trades up, they use it as an opportunity to sell,ö says the source, noting that most other Asian CBs are trading at 94%-95% of face value right now.
The Sunergy bonds were offered with a premium of between 20% and 27% over WednesdayÆs close of $11 and priced at the bottom. The coupon was fixed at 4.75%, or the mid-point of the 4.5% to 5% offering range. Given that the bonds are issued and redeemed at par, the coupon is also equal to the yield. The CB includes a $4.5 million greenshoe.
The ability to buy the bonds as a volatility play was facilitated by a concurrent sale of almost 4.3 million ADS that sole bookrunner Credit Suisse borrowed from Sunergy with the sole purpose of enabling the CB buyers to hedge the equity option. Similar borrow facilities have been used on CBs for other US-listed Asian issuers this year, including JA Solar and Solarfun. The ADS priced at $10.25 per share, which represented a 6.8% discount to WednesdayÆs close. The company, however, receives no proceeds from this $43.8 million sale, which could be increased by up to 162,600 ADS to match the larger size of the CB if the greenshoe is exercised.
The interest among hedge funds was underpinned by the fact that the stock û despite its small market cap of just over $360 million û is liquid with a turnover of about $22 million a day. Analysts are, however, cautious about the company which recorded net losses in both 2005 and 2007. All four firms that cover the stock have a neutral or hold recommendation on it, although Merrill Lynch and Jefferies both have a target price of $12, implying a 35% upside from FridayÆs close of $8.88. The share price has slipped 38% from its most recent peak of $14.29 on May 16 and is down 50% from its December closing high of $17.88.
Partly as a reflection of the companyÆs small size and the fact that it isnÆt a well-known name, investors used a credit spread of 1,200bp over Libor which resulted in a bond floor of 61% and an implied volatility of about 26%, according to the source. Given that the stock is currently trading at a 100-day volatility of 83% the attraction for those wanting to play the volatility was obvious, even though the deal lacked a put option. The drop in the share price over the past couple of days, which once again pushed the stock below its $11 IPO price, may have made them think twice about the trade though.
Sunergy has six solar cell manufacturing lines with an aggregate annual manufacturing capacity of 192MW. It plans to increase this to 320MW by the end of 2008, but will still remain significantly smaller than other Chinese solar cell makers such as Suntech Power or integrated player Yingli Green Energy.
Aside from spending part of the CB proceeds on additional production capacity, Sunergy is also putting more resources into its research and development efforts that aim to enhance the firmÆs solar cell conversion efficiency, which measures the ability of solar power products to convert sunlight into electricity. It is particularly focused on the development of advanced process technologies for the manufacturing of new products such as N-type solar cells which have higher conversion efficiencies than the photovoltaic solar cells that it currently focuses on.
Like other downstream solar power companies, one of SunergyÆs key challenges is the shortage of silicon which is the key raw material used to produce the wafers that are needed to build solar cells. During the two-day marketing of the CB, the company announced that it has entered into an agreement with REC Wafer under which the latter will provide Sunergy with ôa high quality supply of monocrystalline wafers for seven years from 2009 through 2015ö. The company added that the value of the agreement is expected to exceed $400 million and should reduce its reliance on the spot market. The resulting cost savings should also ease the pressure on its margins.
The market reacted positively to that news, driving up the shares by 3.2% before the pricing of the deal.