Thursday, August 16, 2012

More About the A123 Systems Requirement for "Conversion or Repurchase" of the 3.75% Convertible Notes ($AONE)

I mentioned this requirement in my previous AONE post about the definitive documentation relating to the bridge loan facility and the sale of the 8.00% Convertible Notes. Here is the more detailed language (from the 8-K) regarding contingencies for the issuance of the new convertible notes,

"The issuance of the 8.00% Convertible Notes and the Convertible Note Warrants is subject to certain closing conditions, including obtaining the Shareholder Approval, receipt of a favorable determination from CFIUS and receipt of Chinese government approvals on terms satisfactory to the Purchaser in its sole discretion; the expiration or termination of any waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any other antitrust or competition laws; the continued listing of the Common Stock on NASDAQ; the concurrent appointment or election of four individuals designated or nominated by the Purchaser to the Company’s Board of Directors; the Purchaser’s receipt of reasonable assurances that certain government grants and tax credits will remain available for specified periods; the conversion or redemption of all of the outstanding 6.00% Convertible Notes and the related warrants; and the conversion or repurchase of at least 90% of the outstanding 3.75% Convertible Notes on terms satisfactory to the Purchaser in its sole discretion. This significant reduction in the outstanding amount of our existing debt may be difficult to accomplish."
OK, that sounds like more clues that my interpretation - the current equity is going to get massively diluted by the exchange/conversion/retirement of the current notes, before it has a chance to get diluted by the new warrants and convertible notes - may be correct.

I wonder if the company is in the market right now buying back some of the 3.75 convertible notes? The price of these has rallied substantially - from low 20s to almost 40 - since this new deal was announced. So, either the company is buying them back at a discount in the open market, or other people have read this deal the same way I have: good for bonds bad for stock.

However, the company probably won't be able to retire 90% of them through open market purchases. I would imagine that they then announce an exchange offer for these. However, I think it would need to be a really generous offer, like a cash payment, almost all of the existing equity, and maybe even a bond due after the new convertible notes will be due.

In light of this, it does not seem that the current equity (pre-dilution, pre-warrants) should be worth anything; certainly not the current $70 million market cap. I could actually see the sub notes being worth slightly more than the current level and the current equity being worth e.g. 80% less. If I'm right that there is going to be an exchange offer for the current notes, then that would be the catalyst for the revaluation.

No comments: