Thursday, December 30, 2010

Evergreen Solar Implements a 1-for-6 Reverse Stock Split (ESLR)

Evergreen Solar (ESLR) announced today that it is going to implement the previously approved 1-for-6 reverse stock split. According to the press release,

The 1-for-6 reverse split of the Company’s common stock will be effective at 12:01 a.m. Eastern Standard Time, on Saturday, January 1, 2011. Due to the reverse stock split, Evergreen Solar’s common stock will trade under a new CUSIP number, 30033R306, and will temporarily trade under the symbol “ESLRD” for 20 trading days beginning January 3, 2011, after which time the symbol will revert to “ESLR.” The reverse split will reduce the number of outstanding shares of the Company's common stock from approximately 209 million shares to approximately 35 million shares. Proportional adjustments will be made to conversion and exercise prices of the Company’s outstanding convertible debt, outstanding stock options and other equity incentive awards, and to the number of shares issued and issuable under the Company's equity compensation plans. 
In my recent post about Evergreen Solar's recapitalization plan, I mentioned that the split itself will have no economic effect.

Actually, the reverse split will make it a little bit easier to short the common stock (and thereby hedge any purchases of the company's debt), for three reasons: (1) the effect of per-share commissions will be smaller, (2) most brokers require at least $2 in margin per share for short sales regardless of how low the stock price is, and (3) for synthetic shorts using options, the effect of the bid-ask spread on the options will be smaller.

The company has too much debt. The company's 2013 notes trade at ~37 cents on the dollar, which is a 50% yield to maturity! The recapitalization plan involves dilution of the current shareholders in order to get the current debtholders to extend the company's debt maturities and reduce the amount of principal outstanding.

In my opinion, the recapitalization plan is not generous enough to bondholders (especially holders of the 13% notes), and I will be surprised if it meets with much success.


Eric said...

As usual, your analysis seems good.

But what is the trade here?

Do you want to buy the debt?

I would not be 100% comfortable shorting the stock, reverse split or no reverse split; no doubt it is already heavily shorted. I don't like that. Add to that the fact that many stocks rise after a reverse split. Regardless of whether that makes sense or not.

CP said...

I actually am long the debt versus the equity.

The 13% senior secured (convertible!) note trades at 75/80.

I like to hedge it with about a 50%-100% synthetic short through options.

Which will now be easier thanks to the reverse split. Make no mistake, the R/S is bearish.

Please email me ctx_coverage @ if you would like to discuss further.