Tuesday, January 22, 2013

"CEO's dispute with founder pushes Suntech to the brink" ($STP)

"Chinese solar panel maker Suntech Power Holdings is at a crossroads owing to ongoing tensions between its founder and CEO, which have not been resolved, and the maturity of its bonds in March"
Now 51 days until the Suntech bond maturity. The bonds are a pathetic 49 bid, which is a YTM close to 700 percent.

Meanwhile, the equity market is awfully confident. The Feb $1 put is only a nickel! Now, February options expiration is only a month before the bond maturity. If there is an exchange offer proposal, it would really need to be announced before February opex in order to have a fair shot at working.

Let's assume that an exchange offer proposal would tank the stock by 50 percent (not unlikely). In that case, the intrinsic value of this put would be 1-.88 = 12 cents. A 2.4x return!

The market seems to be telling us that an exchange offer proposal is unlikely! Fine - then isn't the alternative just a default? Where does that leave the stock and bond prices then?

18 comments:

jHurt said...

5 cents is awfully cheap all things considered (I see a 3/4 bid/ask actually). Will take a small plunge on it tomorrow but remember well that ATPG's equity traded above $2 even with DIP articles all over Debtwire.

That the March $1 puts premium is 5x more is quite telling.

Jason said...

How do you reconcile the opportunity (irrational retail buyers) with the catalyst (retail recognizing that stock has been diluted)?

CP said...

It's true that Mar 15 is the real catalyst, since that is the likely date of a BK filing. And so, most of my put options are Mar/Jun expiry.

However, Feb 15 is something of a catalyst in that it is probably the drop dead date for an exchange offer. (And I believe that an exchange offer is the only way the company survives.) So you could see smart money selling at that point.

I wouldn't pay as much for a Feb as a Mar, but a 5c $1 put in a company like this is too cheap.

Jason said...

If STP were to propose exchange offer, what percent of bondholders are needed for offer to be approved?

Jason said...
This comment has been removed by the author.
CP said...

It's not a democracy or anything. Participation is voluntary.

They'd have to make the offer generous enough that it wouldn't make sense to say no - e.g. 95-99% of the equity.

Even then, there's not really much reason to accept the offer because you still own a failing company.

I'll bet that behind the scenes the bondholders are holding out for Chinese government money and China is telling Suntech to pound sand.

Possibly these bondholders are restricted from trading which is why no one has made a big bet against the equity.

If is is true, we will never hear anything from the company again and they will miss the Mar 15 payment without having tried an exchange offer.

Jason said...

Ok, thanks CP...in a possible scenario where, like, 80-90% of bondholders accept an exchange offer, what would happen to the 10-20% that do not accept?

Would they receive nothing if STP defaults? Would STP be forced into bankruptcy if they cant get 100% on board with exchange offer?

CP said...

Then the holdouts would have to be paid or it would be a default. And there would be some holdouts, so the exchange offer wouldn't work without some new cash.

But why would anyone invest cash? I think the Chinese don't care whether the holding company goes BK.

That's why I think we will never hear anything from the company again and they will miss the Mar 15 payment without having tried an exchange offer.

ECD Fan said...

Have looked at the Shanghai Chaori Solar Energy situation? ( http://www.reuters.com/article/2013/01/23/china-bond-default-idUSL4N0AS44S20130123 ) What prevents China Development Bank (or some other bank) from stepping in at the last moment and paying off the convert (and maybe even funding an equity purchase), triggering a massive squeeze? Crazier things have happened ...

CP said...

I don't think that situation is comparable. Wasn't that just a deferral of the Chinese bank loans?

Suntech has a huge amount of Chinese bank loans that are being strung along too.

CP said...

What's the Chinese incentive to pay of U.S. hedge funds for the ultimate benefit of U.S. retail investors?

The bullish case is that the Chinese are dumb.

portland_allan said...

Well, I have to say, the bullish case (at least regarding the nickel puts) is US retail investors are dumb.

The company skips the payment, doesn't issue a press release, doesn't declare bk, just pretends the whole situation doesn't exist. The stock continues to trade and brokers continue to rake it in on the churn.

Look how long the common on Fannie and Freddie traded. Look at how many articles you've posted on zombie penny stocks trading long after they've all but turned the lights off at HQ.

Jason said...

Can anyone read chinese...does the following article say the chinese government will pay off debt?

http://time-weekly.com/story/2013-01-23/128707.html

CP said...

Ha! Unfortunately, pretending that everything is fine is no longer an option after the bond maturity date. Such a thing as involuntary BK petitions... although companies always file voluntary ones so that they can have control over the process.

And I've never seen a case where an irrationally overvalued stock didn't decline on the filing date. Think KV, ENER, and AONE...

Also, I don't see anything in that article indicating that the government is going to pay. And I think we'd be hearing from the company if that was the case.

Jason said...

Ok, thanks...heres another article that talks about STP bonds...difficult to understand with google translate...quote in article seems like they will announce news soon.

http://www.nbd.com.cn/articles/2013-01-25/710083.html

CP said...

Can you post a translation? People keep sending me articles that have no useful information.

Jason said...

I used some of the online translation sites like google and bing...trying to see if i can find someone that can read chinese to get better translation.

Below are the relevant paragraphs...

In this regard, the vice president of Suntech Media Relations Gong Xue-Jin told reporters, "Suntech parties are trying to resolve this issue, should soon have news announced."

Up to more than 80% of the debt ratio, as well as $ 575 million of convertible bonds expiring Suntech is likely to lead to bankruptcy due to inability to pay, then, but the country join hands in Wuxi Suntech Power, then in accordance with Wuxi the strength of the League of Nations, to solve Suntech expiring debt should not be a problem, Suntech is the best way out is by the acquisition of state-owned enterprises. "the industry source said the" Daily Economic News "reporter.





CP said...

Well, if there is going to be any news it has to be soon.

One thing to keep in mind when you read these article is the local Chinese political issue of the manufacturing subsidiaries and THEIR bank debt.

And I think in many of those conversations, it's probably a foregone conclusion that the holding company is going bankrupt.

At this point, the conversation is more like, do the banks extend and pretend on those loans so that the plants stay open and the various layers of management don't get sacked (which is what would happen if the subs were "acquired").