Thursday, January 17, 2013

Murmurings About Suntech Power Resturcturing ($STP)

A correspondent sent in an article citing some sources saying that a Suntech exchange offer is being negotiated or is in the works. Here are the highlights:  

  • "We believe the company is negotiating a settlement with the debt holders [...s]ome mix of cash, equity, and a new bond with a longer maturity seems most likely."
  • "Suntech may offer investors new bonds with higher yields and increase the payment period..."
  • "[T]he possibility of a debt restructuring that may eventually wipe out equity value looks more realistic..."
Our assessment is that an exchange offer is the only way to avoid liquidation. A package consisting of cash, stock, and a new bond would make a lot of sense.

I think the bondholders would want to take control after the exchange offer, i.e. receive at least half of the equity. Another constraint is that the current market value of the stock is a little over half the face value of the bonds. Also, I don't think there is much cash to offer to bondholders.

So the third quote rings true - basically wiping out current equity because so much will need to be transferred to the bondholders.

This would be the best possible outcome for the long bonds short stock trade (which is probably the trade that a lot of the bondholders have on) because the stock would get crushed while the bonds would preserve some value.


C.R.L. said...

Those June .5 puts still look cheap to me!

CP said...

hear, hear!

Jason said...

If this exchange offer did happen, what price do you see the stock trading around?

jHurt said...

Sold some longer dated calls. Any place to find the cash position as of 9/30/12 (or later)? See the nice downtrend in cash in the bondholder presentation - the prelim financials state 5% gross margin or $400M of revenue less $98M of operating expenses, but we have their 8/31/12 cash position from the bondholder deck. What a terrible business.

CP said...

Right, that's what happens when you are in a commodity industry operating at less than half of capacity. Brutal.

That's also why Chinese "stimulus" of an extra billion of PV purchases is meaningless: an extra fifty million in gross margin for the whole industry, at best.

What calls are you selling?

There's no up to date financials. I think we can assume they are horrible.

I see an exchange offer taking virtually all the equity. The existing equity price would collapse. If you assumed the post-exchange equity was worth $500mm (very generous) and the bondholders got 85% of this, then the current equity should be worth .15*500= $75mm tops, which would be 40 cents. And I think that's being generous on valuation and percentages.

CP said...

Another scenario: bondholders get 90% of the equity and the post exchange equity is worth only $400 million.

Then the existing equity is worth .1*400= $40mm. That would be 20 cents/share.

And our best guess is that all the subsidiaries are insolvent, so ascribing any value to holding company equity is still a little dubious.