Monday, December 31, 2012

Suntech Irrationality Update ($STP)

Suntech has been on a tear - the stock is up 33% in the past 5 days and now has a market cap of $270 million. The bond market couldn't be any less impressed. Latest trade was ~44 which is a yield of 640 percent to maturity on March 15, 2013.

What's funny (insane?) is that the market value of these bonds is now $250 million which is $20 million less than the market capitalization. The "hole" in the enterprise value through the bonds is $325 million. So, the equity and bond markets differ on valuation by an enormous $595 million!

If you really thought the equity had any value, you would buy the bonds and make 2.3x your money in the next two and a half months. In order for the equity to be an equal or better proposition than this at the current price, you would need to think that the equity is currently trading at only 44% of its real value (i.e. $3.41).


Jason said...

Is it possible for STP to do a negotiated settlement, with bondholders receiving around 40 to 50 cents on the dollar? If this was possible, would this be a reason why an investor would purchase the equity in lieu of bonds?

CP said...

Of course, any bondholder could agree to such a transaction on his own.

However, under U.S. law, you can't force a bondholder to take less than the stipulated amounts of principal and interest, except under a plan of reorganization in bankruptcy court (where the absolute priority rule would govern).

Jason said...

Ok thanks...just trying to find rational reason for the large increase in stock price, while the bonds are still trading around $44.