Disappointing full-year earnings from several solar power players, including Suntech itself, and a shift from high-beta stocks to less ôriskyö paper amid concerns about a US slowdown, has led to a 66% collapse in its share price since reaching a record close of $88.35 on December 26. When the CB priced after the close of New York trading Tuesday, the stock was quoted at $30.24, which was slightly below the $37.51 where it traded when it became the first Chinese company listed in the US to issue a convertible bond in early February 2007.
The CB, which was completed following a 24-hour bookbuilding exercise, was well received though, which allowed the conversion premium to be fixed at the wide end of the 31% to 36% range. The issue was also upsized to $500 million plus a $75 million greenshoe from $425 million plus a $75 million greenshoe initially, which will provide the company with more money to expand its production capacity and to put new technologies into commercial use.
In a regulatory filing announcing the bond issue, Suntech said it would use $300 million of the proceeds to buy ôupstream suppliesö, which refers to the silicon wafers that needs to make solar cells and modules, and the rest for the earlier mentioned purposes. Any additional money received if the greenshoe is also exercised will go towards general corporate purposes and potential acquisitions of, or investments in, new businesses or technologies.
The coupon was fixed at the high end of the 2.5% to 3% range, however. The coupon is also equal to the yield since the CB has a par-in, par-out structure, which is common practice on US convertibles. The bonds have no put option, and usually no issuer call either. This means the company has been able to secure five-year money at an annual interest rate of 3%, which must be considered as quite attractive. Compared with the 0.25% coupon on last yearÆs issue, 3% is obviously a lot more costly, but part of that would be due to the higher premium (versus 30% last year) and longer maturity, while part would be a reflection of the more uncertain credit environment.
However, the bonds were not without merit for investors either with an implied volatility of about 35%, compared with a 100-day volatility of 95%, and plenty of stock borrow available for them to go short. The conversion price at $41.13 is also well below the high just a few months ago. According to a recent research report by Citi, SuntechÆs average forward price-to-earnings multiple of about 33 times suggests the stock should trade at about $55.
One source says the implied volatility is consistent with the valuations on other CBs issued by liquid large-cap Asian names with plenty of borrow. One example being the latest CB by KoreaÆs Hynix Semiconductor in December last year, which had an implied volatility of 31% together with a 2.5-year put. However, the conversion premium on those bonds was also higher at 42%.
The share price initially fell more than 9% after the bonds were launched (post the New York close on Monday) as equity investors worried about the potential dilution and hedge funds and other specialist CB investors speculated there wouldnÆt be that much demand and therefore sold short in preparation of getting a full allocation. However, after the company did a telephone conference and a round of one-on-one calls, the orders started to come in and the initial short-sellers ended up covering some of their short positions. At the end of the session, the shares were down 5.7% at $30.24.
The share price rebounded 8% to $32.67 overnight, however, as the final pricing of the bonds became known, which immediately lowered the effective conversion premium to 25.9%.
According to a source, the CB was multiple times covered, with US investors making up about 90% of the demand. The rest came from small tickets out of Europe and Asia.
The valuation, which includes a bond floor of 74.5%, is based on a credit assumption of 600bp over Libor and a 50bp stock borrow cost.
ABN AMRO, Goldman Sachs and UBS were the joint bookrunners. The same team also arranged the companyÆs first CB last year.