Tuesday, December 7, 2010

Initial Notes on Evergreen Solar (ESLR) Recapitalization Plan

Evergreen Solar (ESLR) just announced a recapitalization plan to "slash its outstanding debt and annual interest expense, extend the due date and lower the cost on some of its longer-term debt and provide incentive to convertible debt holders to exchange their notes for shares in the company." The stock is trading at 0.77 after hours, down 8 percent.

One of the elements of the plan is a 1-for-6 reverse split. Assuming the current after hours price, the shares would be $4.68 after the reverse split. However, everyone would have 1/6 as many shares. The reverse split has no economic effect (it doesn't change the market capitalization), it is basically a marketing tool so that the company is no longer a "penny stock".

What WILL have an economic effect are the other elements of the company's recapitalization plan, which is described in the company's Form S-4 filed with the SEC.

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.

As the press release says, "the new 4% notes and the new 7.5% notes contain terms and features that should provide greater incentive to convertible note holders to convert their notes into shares of Evergreen Solar’s common stock more quickly than the existing 4% notes and the existing 13% notes".

"Greater incentive" means lowering the conversion price, which means the debt is convertible into more shares, which means more dilution.

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