Marketing of the bonds began after the close of New York trading on Tuesday and the pricing will be determined at the end of trading tonight (February 8). The bonds are convertible into SuntechÆs Nasdaq-listed American Depositary Shares or into cash or a combination of cash and shares, at the option of the issuer, according to a company release.
The CB, which carries a greenshoe that could increase the total proceeds by $60 million, will be jointly arranged by ABN AMRO Rothschild, Goldman Sachs and UBS.
The bond issue comes after China-based manufacturer of solar cells and modules revised up its guidance for the fourth quarter 2006 at the end of last week. Suntech said it now estimates that its total production output will be in the range of 48MW to 49MW, compared to an original projection of 45MW to 46MW, boosting its net revenues to $188 million to $192 million, from an original projection of $166 million to $170 million.
The company, which is run by its founder and chairman, Zhengrong Shi, also raised its total photovoltaic (PV) cell production output target for 2007 from 250MW to 280MW and its expected 2007 year-end production capacity target from 390MW to 420MW. Both estimates include the contribution from MSK.
The bonds will be sold to 144A-registered investors only and according to sources, their structure is also more typical of CBs issued in the US than those targeted to investors focused on Asia.
For one, the bonds will be ôpar-in-par-outö and will pay a coupon, while Asian issuers typically provide the entire accumulated return at maturity or when the bonds are put back. The sources say the coupon is indicated at 0.25% to 0.75%. And since the CBs will be redeemed at par, this will also equal the yield.
The bonds can be put back after three years and there is also an issuer call that kicks in at the same time, subject to a 130% hurdle.
The conversion premium is offered in a range from 25% to 30%, which seems fairly modest given that prior to yesterdayÆs announcement SuntechÆs share price had risen 164% since the initial public offering in December 2005. In the past year, however, the price has been quite volatile as solar panel manufacturers have been faced with a shortage of silicon wafers which has pushed up prices for this key raw material.
Having climbed above $44 in early February, the share price almost halved to $22.62 in July before starting to rise again. The stock fell 5.2% to $37.51 on Wednesday in the wake of the CB news.
The pricing of the convertible will be based on a credit spread of about 225 basis points above US Libor, people familiar with the offering said, although it was unclear yesterday whether any of the bookrunners would provide a credit bid. However, when it comes to CBs issued by high-growth companies like Suntech investors typically are more focused on the equity story and the volatility than the credit, they noted.
Other assumptions will include a full divided protection and a stock borrow cost of 150 basis points. Depending on the final price, the bond floor is estimated in the low 80s with an implied volatility of 34% to 40%.
While the bond floor looks low, again this ought to be looked at from the US angle, one source argues.
ôUS markets have higher share trading volumes, more developed volatility trading and easier to access stock borrow, which means companies can get more efficient pricing,ö he says.
The offering was said to have attracted good interest from Asia-based investors who are able to buy into 144A issues.
Suntech said it will use $100 million of the proceeds to expand its manufacturing lines for the production of PV cells and modules and thin film modules and to enhance its research and development; approximately $50 million to purchase raw materials; $100 million to repay the one year bridge loan it obtained in connection with its acquisition of MSK; and up to $50 million for other general corporate purposes.
Suntech agreed to pay $107 million for two thirds of MSK, a leading manufacturer of buildings-integrated photovoltaics (or solar power technology), in August last year and last week finalised the price for the remaining third at $53 million. A key aim of the acquisition was to gain entry into the Japanese market, which is the worldÆs largest market for PV modules.
Since it began operations in May 2002, Suntech has increased its manufacturing capacity by 12 times to become one of the world's top 10 manufacturers of PV cells based on production output, the company say on its website. It currently has a market cap of just under $6 billion.
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