Trina Solar sells $120 million CB amid volatile conditions

A concurrent ADS offering aimed at creating a synthetic borrow facility is priced at an 8.5% discount, resulting in a low effective conversion premium.
Trina Solar, an integrated Chinese solar power company involved in the production of ingots and wafers as well as solar cells and modules, has raised $120 million from a convertible bond issue to help fund an expansion of its production capacity and the purchase of raw materials.

The deal, which was priced at best terms for investors, came after the company on Wednesday said it expects its second quarter net revenues to be in the range of $200 million to $205 million, exceeding earlier forecasts by 16%-18% and up 65%-70% from the first quarter. The market responded well, sending the share price 12.9% higher on the day of the release and set a positive tone for the CB, which was launched after the US close on that day. Still, with the CB in the market, the share price remained highly volatile, falling 8.5% the following day and making it a challenging deal for joint bookrunners ABN AMRO, Credit Suisse and Deutsche Bank.

Trina has had the CB in the works for a few months and was forced to defer an initial plan to launch a week earlier because of extreme selling pressure in the US stock market. It also had to compete for investorsÆ attention with a second CB by an Asian issuer that came to market at the exact same time. And with a lot of solar power sector CBs already out there, it seems investors preferred the CB offered by Sino-Forest, a Toronto-listed forestry company with all its plantations and downstream operations in China. At $300 million, the latter issue was also a lot larger, meaning it will likely be more liquid in the secondary market û a quality that investors value highly amid this yearÆs volatile market environment. Trina can raise a maximum of $138 million if the 15% greenshoe is exercised in full.

Also adding to the challenge was the fact that the reference price for the Trina CB was to be equal to the final price on a concurrent placement of American depositary shares that was sold solely with the purpose of creating a synthetic borrow facility for the CB holders. The shares for the ADS offering were borrowed from Trina and resulted in no additional proceeds for the company. However, because Credit Suisse û acting as the sole bookrunner for the ADS offering û had to sell a certain number of shares to cover the delta on the CB, investors were in a position to be able to push down the final price significantly.

Indeed, the final price on the placement was set at $28, representing an 8.5% discount to ThursdayÆs close of $30.61.

In turn, this meant that even though the conversion premium on the CB was set at 21% over the reference price, the effective premium in relation to the latest market price was only 11%. Still, market watchers and bankers agree that it is almost impossible to do a CB these days without offering investors the possibility to hedge the equity option, and if they there arenÆt enough shares available in the market that investors can borrow for the purpose of selling short, then this short position has to be created by means of an artificial borrow facility.

The effective premium returned to the intended levels on Friday when TrinaÆs share price fell another 8.1% to $28.13.

The bonds have a five-year maturity, but can be put back to the issuer at the end of year three. There is no issuer call. The coupon, which is also equal to the yield, was fixed at 4% after being offered in a range between 3.5% and 4%, while the premium was set at the bottom of a 21% to 27% indicative range.

Sources say the CB attracted a small group of less than 20 investors and was about 1.7 times covered. The majority of the buyers were US-based hedge funds, which were likely interested in the deal because of the high volatility in the share price.

The credit spread was assumed at Libor plus 1,000bp, which observers say was fair when considering that a $350 million CB in mid-May for JA Solar, which is viewed as a stronger credit, came to market at a spread of about 750bp. The deal has a full dividend pass-through, although Trina doesnÆt currently pay dividends as all the profits are ploughed back into the company to support the growth of the business. Thanks to the synthetic borrow facility, the stock borrow cost was kept at 50bp.

This gave a bond floor of around 77% and an implied volatility of about 24%-28% depending on who you talk to, which compares with a historic volatility of 91%. TrinaÆs share price had a strong run from early March until mid-May, rising from about $27 to above $50, but by the time the CB priced it had lost most of those gains and was trading 52% below an early November high of $63.67.

The company said in a statement that 3.83 million of borrowed ADS shad been offered to the market, but sources say the final sale amounted to about 2.8 million to 3 million, which was enough to cover a delta of about 75%. This means the total size of the placement was about $78 million to $84 million. In case the overallotment option on the CB is exercised, Credit Suisse will be able to sell more ADSs to cover the additional hedging needs. The bank is able to borrow up to 4.07 million ADSs, which each account for 100 common shares.

The outlook for the solar power sector has improved somewhat as analysts believe the bottlenecks created by the shortage of silicon û a raw material used to make wafers - is about to be ironed out in 2009 with more supply expected to come on stream. However, this could also result in the sector becoming even more competitive, which together with mixed earnings within the sector earlier in the year has limited the potential share price upside even though oil prices have climbed rapidly in recent months, creating a favourable backdrop for alternative fuel sources like solar power.

On top of that, investors also have quite a lot of paper to choose from in this sector, with no fewer than five new CBs by Chinese solar power companies since December and a few follow-on share issues as well. The active fund raising reflects the fact that most of the money raised by a wave of Chinese solar power IPOs in 2006 and 2007 has now been used up û and of course that the companies are growing strongly and thus need to continue to increase their production capacity.

Last week also saw China-based Canadian Solar, which makes solar modules and products and is active within recycling of silicon, raise $119 million from the sale of 3.5 million new ADS in a deal arranged by Deutsche Bank. The small offering attracted more than 60 investors and was priced at a 4.6% discount to WednesdayÆs close of $35.65, giving an issue price of $34. The deal, which was launched after the close of trading on Monday and priced on Wednesday, includes a 15% overallotment option that could boost the total proceeds to $137 million.

Canadian SolarÆs share price fell 7.1% during the marketing period and dropped another 12% in the wake of the deal on Thursday and Friday.
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