In the end, the designer and manufacturer of solar cells and modules issued $425 million worth of bonds with an option to sell an additional $75 million if the demand in the secondary market proves to be solid as well. The initial plan was for a base size of $300 million with a $60 million upsize option.
From the companyÆs point of view, the bonds were also priced at the most aggressive end of the indicated ranges, suggesting investors werenÆt particularly price sensitive. This meant the conversion premium was set at 30% over WednesdayÆs close, while the coupon was fixed at 0.25%. The coupon is also equal to the yield since the five-year bonds will be both issued and redeemed at par. If investors choose to put the bonds back to the issuer at the third anniversary, this too will be done at par.
The bonds, which were sold to 144A-registered investors only, were marketed with a yield range of 0.25% to 0.75% and with a conversion premium of 25% to 30%.
Joint bookrunners ABN AMRO Rothschild, Goldman Sachs and UBS decided to close the books at the end of New York trading Wednesday after only one day of marketing, by which time the upsized bond issue was already four to five times covered, according to sources. The same people estimated that more than 50 investors û the majority from the US - had submitted orders.
Even though the marketing was limited to one day, the management was able to do about seven or eight one-on-one calls with key investors and it also did a conference call that saw hundreds of potential investors dial in, people familiar with the issue said.
The solar power sector remains a ôhotö investment topic overall, but one observer noted that investors are particularly keen on Suntech, which was the first Chinese solar power play to list in the US back in December 2005. Over the past three months it has been accompanied in the US markets by four other Mainland-based companies in the same sector, including JA Solar Holdings which debuted on Wednesday, but these are still small compared with the first-mover, which has a market cap of just under $6 billion.
ôSolar power is still a concept at many of the companies that are coming to market now, while Suntech has a proven track record of one more year that shows it can deliver on its earnings. I guess investors find this comforting,ö the source says.
At the same time, he notes, convertible bonds are quite a good instrument for investors who are bullish on the stock, but still a bit cautious about the solar power concept. ôIf anything happens, at least they will get their money back in three years.ö
Because the share price fell 5.2% to $37.51 on Wednesday in the wake of the CB news, the effective conversion premium will also be reduced by the same amount, making the deal slightly more appealing for investors who were buying it primarily for the equity option. Observers say the decline was likely to have been at least partially due to investors hedging their purchase of the CB by going short the equity.
Still, the premium should be palatable for the company as the share price also gained 10.2% on Monday after the company revised up its production and revenue estimates for the fourth quarter as well as its output target for 2007. The stock has risen 150% since its IPO.
It has been quite volatile over the past year, however, as the sector suffered from rising raw material prices due to a shortage of silicon wafers which are used to make solar cells. The share price rose to a high above $44 in early February 2006 and then almost halved to $22.62 in July before starting to rise again.
Over the past six months, Suntech has been able to secure a stable supply of raw materials at a reasonable price, which according to one source is one reason why the share price has seen such rapid gains. At present it has secured at least 70% of the wafers it needs to meet its production targets for 2007.
The pricing was based on a credit spread of 225 basis points above US Libor. ABN AMRO was said to have provided some asset swaps at that level, but with most investors looking at the CB as an equity and volatility play, there wasnÆt believed to have been much interest for that.
The other assumptions included a full divided protection and a stock borrow cost of 150 basis points. At the final price, the bond floor ended up at 81% and the implied volatility at 40%. The latter compares with at 60-day volatility in the mid-40s.
Suntech said it will use $150 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 $100 million to purchase raw materials; $100 million to repay a one year bridge loan it obtained in connection with its acquisition of MSK Corp.; and the remaining portion 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.
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