"Auction date extended for ECD's sale of solar panel firm"

I had stopped paying attention to ENER, but saw this in the Detroit News:

"[E]nergy Conversion Devices Inc. said Monday it has extended by two weeks the auction date for the sale of United Solar Ovonic LLC, its manufacturer of thin-film photovoltaic solar panels."

Apparently, a company called Salamon Group wants to buy ENER for its net operating loss carryforwards:

"This offer is for up to 100% of all issued and outstanding shares of the Company. The offer is in exchange for up to 5 million shares of Salamon Group, Inc. (SLMU). Energy Conversion loss-carry forwards are over $1 billion USD."

It's not clear to me that this transaction would work. The IRS rules on NOLs impose significant limits on the ability to use them to offset taxable income in the event of an ownership change.

Best Part of the ENER Trade

The stock was down 80 percent today and the bonds rallied from high 30s to about 45 (about a 15 percent increase). I had added to the bonds last week in the mid-30s. That is as I predicted: "the common stock is worthless in a liquidation, but the notes are worth nearly twice as much."

And as more information comes in and people process the news, I would expect the bonds to keep trading higher. The Ovonic subsidiary sold for $58 million, which is significantly higher than I had modeled, plus we don't have to worry about value destruction as much now that the company is in bankruptcy.

An article in the Detroit News has some more color from investor relations. By the way, it is unusual to file for bankruptcy on a weekday. There are a set of first day motions that need to be approved, like getting approval from the court to pay your employees and spend any cash, and the process typically goes more smoothly with a weekend bankruptcy filing. In fact, the filing this morning was a complete bolt from the blue - I would not have given a high probability to a Tuesday morning BK filing.

WSJ Article on the Energy Conversion Devices ($ENER) Bankruptcy Filing

"While the company's shareholders will likely be wiped out under the bankruptcy, the federal government—already singed by Solyndra LLC's bankruptcy—won't get burned by Energy Conversion Devices' Chapter 11 filing. The company's solar-technology business, United Solar, applied for, but didn't receive, a loan from the Energy Department's loan guarantee program..."

Energy Conversion Devices ($ENER) Posts FAQ For Investors

FAQ is posted here.

Q. Why did you need to do this now and not in 2013 or when you run out of money?
A. The large amount of debt is crippling our business, preventing us from realizing our true potential. The company is burdened by costs incurred over the years which we are still paying for. While unfortunate, we cannot continue to operate in this state. Therefore, the decision was made in the best interest of the company in the hopes of creating a new, sustainable, financially stable entity. We’re looking for a fast turnaround to better the chances we have of success.

Q. Will my common stock be worth anything in the future?
A. Based upon the estimated value of the Company’s assets and forecasted costs and operating losses during the Chapter 11 process, the Company does not expect to generate proceeds sufficient to satisfy all of the Company’s pre-existing obligations to its creditors. Accordingly, unless the Company realizes greater-than-expected value from the sales process, the Company expects that no distributions will be made to holders of common stock and the common stock will be extinguished upon confirmation of the Chapter 11 plan.

The Waiting Was the Hardest Part

"Energy Conversion Devices Files Chapter 11; Seeks Sale of Businesses"

"Based upon the estimated value of the Company's assets and forecasted costs and operating losses during the Chapter 11 process, the Company does not expect to generate proceeds sufficient to satisfy all of the Company's pre-existing obligations to its creditors. Accordingly, unless the Company realizes greater-than-expected value from the sales process, the Company expects that no distributions will be made to holders of common stock and the common stock will be extinguished upon confirmation of the Chapter 11 plan."

More Solar Bad News

Silicon wafer manufacturer Sumco exiting solar wafer market and firing 1300 workers:

"Citing 'structural' overcapacity, 'significant price declines' and a fall in demand of crystalline silicon wafers, Sumco has decided to completely exit the market."

Here is their handy chart of the collapse in silicon wafer prices. That is from this presentation on their reorganization plan.

Meanwhile, here is a better description of what the end of the ear 2011 was like for photovoltaic solar firms,

"[M]any were surprised at just how low prices went. Crystalline prices at the end of 2011 were a massive 45% lower than they had been at the end of 2010, exceeding even the most aggressive forecast for price reductions."

Another report said that as of the end of December, half of Chinese solar firms had ceased production entirely.

A Worthless Stock Buyer, Observed in the Wild!

This is from an article on "thestreet.com" called "5 Stocks Under $10 Set to Soar". Before we start, raise your hand if you think that the stocks are expected to soar for fundamental reasons. If you said yes, go back to square one.

"Traders savvy enough to follow the low-priced names and trade them with discipline and sound risk management are banking ridiculous coin on a regular basis. [...] I definitely love to trade stocks that are priced below $10. I like to view them as a trading vehicle with lots of volatility and lots of upside when the trade is timed right."

Note that his emphasis was on "trade" - and on not getting caught holding the bag. He mentions three solar stocks (!), including Energy Conversion Devices.

Anyway, his comment about volatility is funny, because it is precisely the hypothesized reason for the worthless stock inefficiency. As Kumar (who calls them "lottery-type stocks") wrote,

"high idiosyncratic volatility is important in the sense that it may lead investors to amplify their perception about skewness. This would be especially true if they adopt an asymmetric weighting scheme and assign a larger weight to upside volatility and ignore or assign lower weight to downside volatility."

So... the "set to soar" article is another data point in support of our worthless stock theory.

Solar Earnings Roundup

• DuPont's quarterly revenue missed Wall Street expectations as its customers bought fewer solar-panel materials and digital television parts, offsetting strong demand for chemicals used in agriculture. (Jan 24)
• The glut of photovoltaic panels that wiped $30 billion from solar stocks last year is likely to expand in 2012, forcing manufacturers out of the industry... (Feb 1)
• SMA Solar, Germany's biggest solar company, said it was unable to give an outlook for the ongoing financial year, blaming regulatory changes in key markets and the euro zone debt crisis. (Jan 13)
• STR Holdings announced that revenue is projected to approximate $36.5 million for the fourth quarter of 2011... below the Company’s guidance of $44 to $48 million. (Feb 3)
• Due to uncertainty on feed-in-tariffs and other legislation, as well as the global macroeconomic uncertainty affecting end market demand in both SBUs, Power-One is not providing full-year guidance for 2012. (Feb 2) 
• Prices for solar panels dropped 47 percent last year to $0.94 a watt after the 10 largest makers including China’s Suntech Power Holdings, the biggest, and No. 2-ranked LDK Solar, together doubled production capacity in 2010... The companies forecast a decline in shipments for the fourth quarter of last year. (Jan 5)

Energy Conversion Devices ($ENER) - What Are the Notes Worth?

It is sort of absurd that we are going to talk about the recovery value of Energy Conversion devices debt on a day that the common stock was up thirty percent. In a sane world, that increase would imply some sort of good news or rational basis for optimism.

However, this is the world of capital structure arbitrage. Our research into the worthless stock inefficiency shows that a group of mostly retail investors buys these stocks because they behave like lottery tickets. From the time we have been paying attention to ENER, it looks like institutional investors have continued to sell out, and are now down to around a quarter instead of a third.

Anyway, back to the liquidation analysis. The most recent balance sheet we have is for September 30, 2001 from this 8-K filing. The first part of the analysis is to look at the assets. [Note that the company has not announced any plans to liquidate - I am just considering where bondholders and stockholders would likely turn out if that was the case. There is a wide margin of error because the numbers we have are now four months old.]

I'm assuming that the company burned $5 million cash during the fourth quarter of 2011. We really don't know, but we are certainly assuming that the quarter did not go well, given that the company suspended operations and laid off 70 percent of their workforce on November 8.

I'm assuming that accounts receivable would take a 20 percent haircut and inventory a 25 percent haircut - both seemingly reasonable given the lack of detail about these items. Other assets (e.g. prepaid expenses) I assume are worthless. I actually assume that the Ovonics subsidiary is worth ten million dollars more than the carrying value.

In the long-term asset category, I assume a 75 percent loss on property, plant and equipment. I assume 20 percent haircuts on the restricted cash and lease receivables. And a total haircut on the other long-term assets.

	As of 09/30/2011		Haircut	Value
Cash & Short Term Investments	119,876		-5,000	114,876
Accounts Receivable	21,621		20%	17,297
Inventory	68,012		25%	51,009
Other	13,957		100%	0
Ovonics	4,253		10,000	14,253
Total Current Assets	227,719			197,435
PP&E	59,064		75%	14,766
Restricted Cash	10,365		20%	8,292
Lease Receivable	11,428		20%	9,142
Other	9,857		100%	0
Total Assets	318,433			229,635

That results in a liquidation value of the assets of $229.6 million versus the current carrying value of $318 million.

Meanwhile, I value all of the liabilities at the amounts on the balance sheet, and I assume that the notes would share equally with the other unsecured creditors in the recovery value of the company.

	As of 09/30/2011		Haircut	Value
A/P	31,200		0%	31,200
Warranty – current	14,284		0%	14,284
Other	11,082		0%	11,082
Senior Notes	235,781		0%	235,781
Lease Obligations	21,134		0%	21,134
Other	16,916		0%	16,916
Total Liabilities	330,397			330,397

The result is $330 million in total liabilities, which exceed the liquidation value given above by $100 million! If my analysis is correct, buyers of the common stock are paying $60 million for a claim that is out of the money by $100 million.

Anyway, if all of the corporate liabilities share equally in our estimated liquidation value, that means that the unsecured claims are worth 70 cents (~70=230/330). Interestingly, this is 77 percent higher than the current trading value of the notes. So, given this initial set of assumptions, the common stock is worthless in a liquidation, but the notes are worth nearly twice as much.

I've put together a stress test analysis below, which uses the assumptions made above but shows the unsecured recovery percentage given different assumptions regarding what the property, plant, and equipment is worth, and also how much more cash (in thousands) the company burns before it liquidates.

		Continued Cash Burn
		-15000	-25000	-35000	-45000	-55000
Writedown of PP&E	100.00%	0.60	0.57	0.54	0.51	0.48
	80.00%	0.64	0.61	0.58	0.55	0.52
	60.00%	0.68	0.65	0.62	0.59	0.56
	40.00%	0.71	0.68	0.65	0.62	0.59
	20.00%	0.75	0.72	0.69	0.66	0.63
	0.00%	0.78	0.75	0.72	0.69	0.66

It is interesting that for all these assumptions, the notes are still worth more than the current trading price of around 40. Yet, under none of the assumptions does the equity come close to being in the money. [Note that the assumptions where PP&E are worth the balance sheet carrying value are presented for completeness and are not necessarily realistic. It would be basically unheard of for a liquidating manufacturer to be able to sell its plant without taking a loss.]

This painted an awfully optimistic recovery scenario for the notes. Let's do it again with a slightly different set of assumptions for the other balance sheet items.

We will assume that in Q4 2011, the company lost ten million in cash instead of five. We will assume an accounts receivable write down of 25% instead of 20%, and an inventory writedown of 33% instead of 25%. We keep the value of Ovonics the same, but assume that all the restricted cash is burned.

		Continued Cash Burn
		-15000	-25000	-35000	-45000	-55000
Writedown of PP&E	100.00%	0.54	0.51	0.48	0.45	0.42
	80.00%	0.58	0.55	0.52	0.49	0.46
	60.00%	0.62	0.59	0.56	0.53	0.50
	40.00%	0.65	0.62	0.59	0.56	0.53
	20.00%	0.69	0.66	0.63	0.60	0.57
	0.00%	0.72	0.69	0.66	0.63	0.60

I end up thinking that the notes are worth about 50, which would be a fair return for the opportunity cost and risk in owning them. I also do not see any reason to be enthusiastic about the stock.

Undifferentiated Trading in Solar Stocks

This is a chart of Evergreen Solar common and Energy Conversion common over the past month.

Notice the very high correlation. Basically, every highly shorted stock spiked sharply last week (which of course meant the solar stocks did too).

It's funny because there is very little uncertainty about the value of ESLR stock: the company is in bankruptcy, the secured debt is taking a big haircut, the unsecured debt is getting virtually nothing (trading at less than a cent). Clearly, there is no good news or reason to buy the ESLR shares.

That allows us to test the hypothesis that there was no information content in the rally; just undifferentiated buying of highly shorted stocks.

What we see in the ESLR/ENER chart is consistent with that hypothesis.

Energy Conversion Devices ($ENER) - What Are the Notes Worth?

The real questions with ENER from a bondholder perspective are: at what rate do they continue to burn cash, how long will they continue doing so, and what are the plant & equipment worth?

They are burning cash more slowly now that they have halted production. Unfortunately, they are investing money in new equipment to keep the dream alive. As a bondholder I do not view that as a good investment.

Still, the bonds trade at less than my estimate of the current liquidation value. However, I cannot see any possible (p>.05) scenario where the bonds receive par upon maturity next year. This implies that the stock is overpriced.

Greentech Solar on the Solar Bust

From a Greentech Solar post:

"A source has indicated that MiaSolé is for sale. But every solar company is for sale these days -- except perhaps for First Solar and the leading Chinese crystalline silicon firms."

Solar can't compete with natural gas. The Spiegel has an article "Re-Evaluating Germany's Blind Faith in the Sun". German PV solar has been an enormous boondoggle because... Germany is not sunny. If Arizona doesn't use PV solar, how could it possibly make sense in Germany?

Meanwhile, the price of polysilicon (primary input for PV cells) has fallen drastically. This is good for the cost competitiveness of PV solar generally.

However, the primary advantage of thin film solar technologies - like Evergreen - was that they used less silicon. That provided a meaningful cost advantage when silicon was expensive.

Barron's: "Solar: ‘Junk Rally’ Ignores China Pitfall, Says Jefferies"

In Barron's:

"Jefferies & Co. renewable energy analyst Jesse Pichel today opines that a recent bout of short covering that has lifted shares of solar energy technology companies is destined to come to an end. The "solar junk rally," as Pichel refers to it, is failing to price in some looming risks..."

Look at the comments! His article brought irate retail investors out of the woodwork.

Time to Put the Energy Conversion Devices ($ENER) Capital Structure Trade Back On

You may recall that we previously had a capital structure arbitrage trade on in Energy Conversion Devices, which we closed out last year when the stock collapsed to a de minimis value. I think I am going to put the capital structure trade back on. That is actually the best trade idea I have right now.

The reason is that an incredible short squeeze has taken place in the ENER stock, catapulting it from 20 cents to a high of 1.50 today. Meanwhile, the bonds have hardly traded, and are yielding nearly 80 percent. The prices of the company's bonds and common stock are inconsistent and imply wildly different valuations for the company.

Solar Short Squeeze
ENER manufacturers photovoltaic solar materials. The first two weeks of January have seen incredible short squeezes, in almost inverse proportion to the underlying strength of the business, for example in Evergreen Solar which has demonstrably worthless stock.

The other argument for the ENER rally is a recovery in the photovoltaic solar industry. Yeah, right. You can get a good sense of that possibility by reading this paragraph from a recent First Solar filing:

"In connection with a continuing objective of balancing production capabilities with market demand, [First Solar] is evaluating various means to reduce 2012 annual manufacturing production by more than 400MW. The Company expects to produce approximately 2GW of modules in 2012, reflecting an approximately 80% manufacturing capacity utilization rate, compared to an expected manufacturing capacity of approximately 2.5GW by the end of 2012. The Company expects to strategically idle some manufacturing capacity in 2012 in order to implement upgraded process technologies across existing manufacturing lines as part of its accelerated conversion efficiency improvement initiatives, and to better align production with expected market demand. The Company also expects to qualify its Mesa, Arizona manufacturing plant in 2012, but does not expect to start commercial production at this facility until 2013."

If FSLR is idling capacity, there is not going to be profitable business to be had by the smaller marginal solar producers. Marginal firms only do well when there is so much demand that the big firms in an industry are turning down orders. Here is more color on the PV solar market, from a Credit Suisse report:

“We caution that policy news tends to be very volatile day to day, and there will be occasions when a piece of news is interpreted as positive. However we think there is risk now that Germany will act in a way that reins in the pace of installations, adding to the oversupply in 2012, just like Italy did last year, and Spain in 2008. Last week’s solar rally is vulnerable to news flow on policy risk.”

Actually, the last we heard from ENER, they were completely idling their manufacturing to save money. This was from a filing on November 8:

"On November 8, 2011, Energy Conversion Devices, Inc. (“ECD” or the “Company”) publicly announced the temporary suspension of all manufacturing operations as an inventory control measure. ECD will continue to serve its customers through its direct sales force and its global network of solar integrators and building materials suppliers. The company expects to resume production in its manufacturing facilities as soon as possible once the existing inventory has been sold and market conditions warrant.

As a result of the suspension, 368 manufacturing associates have been laid off, while another 400 have been temporarily furloughed. The affected associates are located across the company’s Michigan, Mexico and Ontario manufacturing facilities. In addition, the company will lay off 132 associates from its corporate overhead worldwide. The estimated annualized cash savings from these actions is approximately $12.7 million.

In connection with the implementation of this plan, ECD will incur restructuring and other related charges in the second and third quarters of fiscal year 2012 totaling approximately $1.6 million."

According to Yahoo Finance, the company only has 1300 employees - so 70 percent of them have been idled. They are in complete free fall! That is why the stock was at 20 cents! Yet, it got swept up with the early January short squeeze and the misguided enthusiasm for solar stocks. I haven't heard an announcement from ENER about how sales are going, or whether they are any closer to restarting operations.

To me, the PV solar market represents a bet on three things: (1) rational demand based on unsubsidized IRR; (2) irrational demand from European subsidies; (3) irrational demand from Chinese subsidies. The rational demand has completely evaporated with the decline in natural gas prices over the past quarter.

Europeans can no longer afford alternative energy boondoggles, which was the big reason for the PV solar crash last year. That has not changed. The total German PV installation surprised to the upside for 2011, but the bad news is that the German PV subsidy will be cut by 24 percent as a result of this.

China has said that it will install 3 GW of PV solar in 2012. Remember from above that First Solar has idled 0.5 GW of their capacity in 2012. Anyway, China favors Chinese firms for solar projects.

For a given PV solar firm, their ability to sell depends on (1)cost and (2) bankability. Cost is a function of scale and technology, both of which favor the larger firms like First Solar. Bankability, meaning whether banks that finance projects believe that you will honor your warranty, is a function of balance sheet strength. Obviously, there are concerns with ENER in this regard.

ENER Capital Structure
Energy Conversion Devices has one series of debt, the three percent convertible notes due June 2013. There is $260 million face value of outstanding notes, which trade at 37.5 percent of par, for a market value of $100 million.

However, the company has $120 million in cash and short-term investments as of September 30, 2011. If the company could buy back its debt at a discount in the market without affecting the price, it could theoretically retire all the debt and have cash left over.

The fact that the market value of the bonds is less than the amount of the company's cash and short term investments means that the bond market ascribes a negative value to the company's business and investments in alternative energy: the “enterprise”. This is probably correct, because it implies that the company will continue to burn cash before eventually being forced into restructuring.

Were this simply a case of bonds trading at under forty cents on the dollar when the company has perhaps fifty or sixty cents worth of liquidation value, it might be interesting but still troublesome because that liquidation value would continue to fall as the company lost money in its operations.

The exciting part is that the company's market capitalization – the market value of its common shares – is $70 million. In order for the common shares to be worth anything, the enterprise must be worth as much as the face value of the debt ($260 million) minus the cash and short term investments ($120 million), which is $140 million. And a market capitalization for the stock of $70 million implies that the enterprise is worth $210 million. What does it mean if the stock market implies a valuation of $210 million for the same enterprise that the credit markets give a negative value?

Clearly, the valuations are mutually exclusive, and so only one of them can be correct. Ultimately, it does not really matter whether the bond market or stock market is right, because we can bet that the inconsistency will converge. By buying the bonds and shorting the stock, we can simultaneously “create” the enterprise at a negative valuation and sell it at a positive one. In fact, this situation is the first one I have found where the interval of enterprise valuations implied by different securities includes both negative and positive valuations.

Part of my investment process is to form a plausible hypothesis for why a market inefficiency or opportunity might exist. In this case, I can think of two possible explanations. First, an arbitrage opportunity involving a market capitalization less than $100 million is so small that many sophisticated arbitrageurs will not even look at the situation. Second, close to three-quarters of the Energy Conversion Devices stock is held by retail investors. These types of investors are generally oblivious or indifferent to the company's bond price, yet they are the marginal buyers setting the price of the stock. If they were paying more attention, they would consider selling their stock in a company with bonds that yield 80% to maturity, and buying the bonds instead.

Actually, it would appear that many of the marginal buyers that have pushed the price up this week don't actually have an opinion about the value of the company - they just want to "rent" a stock that is going up. A great way to check this is the Yahoo "Market Pulse" for the stock, which aggregates tweets and whatnot. The retail crowd got excited because the stock went up.

Recent Developments
The other major disclosure recently, besides the fact that they idled all of their capacity, was that they have started down the restructuring path:

"We expect to continue to refine these restructuring efforts and align our resources as conditions warrant to better execute on the revised technology roadmap and Open Solar business model. Although we are not currently experiencing significant liquidity constraints, we believe that a successful repositioning of our United Solar Ovonic business will require additional investment and refinancing or restructuring of our outstanding Convertible Senior Notes (“Notes”). We intend to invest the proceeds of any sale of OBC in our United Solar Ovonic business to support funding of our technology roadmap and Open Solar™ initiatives. We are considering a range of strategies to attract additional needed investment and we have retained the financial advisory firm of AlixPartners to assist us in evaluating our strategies. These strategies may include additional asset sales, technology license agreements, joint venture arrangements, renegotiating existing obligations or other transactions.

In connection with the foregoing, we have begun discussions with representatives of an informal group of noteholders regarding our repositioning efforts and to explore the group’s interest in restructuring our obligations under the Notes. Our discussions are at a preliminary stage. If we are unable to reach an accord with the noteholders or execute sufficiently on one or more of the strategies that we are considering to attract required investment, we may choose to seek reorganization under the U.S. Bankruptcy Code."

They are planning to sell the non-solar research subsidiary, which does about a modest amount annually through royalty revenue. That might be good for a bit of recovery of bonds. It is telling, though, that they are going to sell it and "reinvest" the money in the money-losing solar business.

Here is an interesting fact that tells you about the company's debt levels: in the most recent quarter, interest expense was 26 percent of revenue. Earlier this week, the company made its "previously deferred semi-annual interest payment" on the notes. They had taken advantage of a 30 day grace period not to pay. Apparently, that is wildly bullish!

Potential Catalysts
If I were in their shoes, I would offer the noteholders a combination of cash, new notes, and stock. I could see a coercive offer that gave the notes, currently trading at ~35, perhaps 10 cents in cash, 50 cents in new senior secured notes, and a majority equity stake in the company.

The noteholders should hold out for a lot of stock, preferably a controlling interest in the company, maybe even all of it, depending on what else they are offered. In these situations, you will often see management given a big chunk of the company (5-10%) to turn the keys over to the bondholders.

P.S. Someone else apparently agrees with me. Someone shorted "about 3,800 January 1 calls for $0.50 to $0.69. Volume is more than 4 times open interest in the strike." Selling calls is attractive compared to shorting the stock.

Energy Conversion Devices (ENER)

We closed this capital structure arbitrage trade last year, but it is a perfect example of the insanity that took place today. The stock was up forty percent while the bonds traded an oddlot at 33, which was actually down slightly from yesterday.

This is another one with massive short interest. (And it looks like 70%+ retail ownership.)

Photovoltaic Solar

It works like this: a photon of light comes in from the sky, penetrating some depth into the silicon. If it has enough energy (imagine a sign out front: “you must be this tall to go on this ride”), it can pop an electron out of the lattice, leaving a “hole” behind.

Energy Conversion Devices ($ENER) Files Form 8-K: Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing

Today was an odd day in Energy Conversion Devices (ENER) common stock. It rallied out of the gate and then there was a huge superspike up at 2pm, of the type that you often find in worthless stocks. The superspike deflated and then after hours the company put out a Form 8-K regarding its failure to satisfy NASDAQ continued listing requirements:

"On September 15, 2011, Energy Conversion Devices, Inc. received a deficiency letter from The NASDAQ Stock Market notifying the Company that it no longer meets NASDAQ’s requirements for continued listing on the NASDAQ Global Select Market... because the minimum bid price of the Company’s common stock has not equaled or exceeded $1.00 at least once over a period of 30 consecutive trading days. [...] The Company intends to actively monitor the bid price of our common stock and will consider available options to resolve the deficiency and regain compliance with the NASDAQ requirements. Such actions could include implementation of a reverse split of the Company’s common stock, which would need to be authorized by the Company’s stockholders, or other possible actions."

Not accusing anyone of anything, but I remember trading another now-bankrupt solar stock that it was uncanny how often there would be a huuuge rally followed by a bad news release. It got to the point where you could be highly confident that rallies meant bad news.

There is a capital structure arbitrage opportunity in ENER, because the company's 3% convertible notes due 2013 trade at ~47 to yield over 50% to maturity! Also, the company has a cash balance that is greater than the current market value of the convertible notes, meaning that the note price implies a negative enterprise valuation.

In contrast, the eight-figure market capitalization implies a much higher enterprise valuation. The prices of these two parts of the capital structure certainly seem to be inconsistent, which would indicate an arbitrage opportunity.

Also worth noting is that the convertible notes traded higher volume today but didn't so much as break the 50 price level where they were only about a month ago. I imagine that arbs were buying the notes and shorting the stock today.

Solar Company Earnings are In (Mostly)

From Greentech Media

"For many solar firms and their investors, the second quarter and first half of 2011 could not have ended soon enough. The common refrain was that high inventories, and a lack of transparency in German and Italian policy impacted share price, ASPs, profit, and revenue."

Of course, there is one PV solar company that hasn't reported earnings yet.

First Solar Reports Lower Revenue, Earnings Due to European Subsidy Setbacks (FSLR, ESLR, ENER)

First Solar announced disappointing results for the second quarter of 2011:

Net sales were $533 million in the quarter, a decrease of $34.5 million from the first quarter of 2011, primarily due to lower average selling prices (ASPs) as solar photovoltaic (PV) policy uncertainties in Italy, Germany and France adversely impacted demand in the second quarter. Quarterly net sales decreased from $588 million in the second quarter of 2010... Second quarter net income per fully diluted share was $0.70, down from $1.33 in the first quarter of 2011 and $1.84 in the second quarter of 2010.

This is the bellwether solar company, so important to follow in thinking about other solar companies like Energy Conversion Devices and Evergreen Solar.

First Solar is a ten billion dollar company. Smaller companies will have a harder time being competitive for two reasons: when it comes to the "bankability", or ability to borrow for, a PV solar project, lenders are going to prefer a company that will be able to honor the manufacturer warranty. Second, the struggling companies are limited in their ability to invest in research and development, which is essential because the competition is lowering its costs every year.

The First Solar guidance is for almost a billion dollars in operating income. If they wanted to, they could easily buy a number of their competitors. Evergreen Solar secureds are trading at ~35, which values the company at $50 million and change. Energy Conversion Devices bonds essentially value that company at a negative enterprise value. What does it tell you when a big company isn't even interested in buying two smaller competitors for less than one month's cash flow?