Full Circle: Evergreen Solar plant sold to Hackman Capital

"Bankruptcy court has approved the sale of solar panel maker Evergreen Solar’s shuttered plant in Devens, Mass., to Hackman Capital Acquisition Co. LLC for $8.53 million, according to Bloomberg."

Wow...! The bankruptcy was Aug 15 of last year. What a journey that was.

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.

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.

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.

Another Short Squeeze - Evergreen Solar

Look at what happened with Evergreen Solar over the past week. From a couple cents to a high of 23 cents yesterday! Over 10x!

Recall that Evergreen is in bankruptcy. Its nearest maturing unsecured debt is trading at a tenth of a cent! Only the secured creditors are getting anything.

For there to be a posted bid at all for ESLR shares is deeply irrational, and an example of the worthless stock inefficiency. And this thing traded almost 10 million shares this week! That means someone threw away close to a million dollars.

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.

Evergreen Solar ($ESLR) Update on Restructuring Plan

Contains this gem:

"The Company’s shareholders are cautioned that trading in shares of the Company’s common stock during the pendency of the Bankruptcy Case will be highly speculative and will pose substantial risks. The Company expects that the currently outstanding shares of its common stock will be cancelled and extinguished upon confirmation of a restructuring plan by the bankruptcy court. In such an event, the Company’s shareholders will not be entitled to receive or retain any cash, securities or other property on account of their cancelled shares of common stock. As a result, the Company expects that its currently outstanding common stock has no value. Trading prices for the Company’s common stock may bear little or no relationship to the actual recovery, if any, by holders thereof in the Company’s Bankruptcy Case. Accordingly, the Company urges extreme caution with respect to existing and future investments in its common stock."

Well put: the common stock price "may bear little or no relationship to the actual recovery." Just as I discussed in the post about "Who Trades the Stock of Bankrupt Firms?"

$ESLR: "Expected That No Distributions Will Be Made to Holders of Common Stock"

"Based upon the estimated value of the Company’s assets, the assets are expected to be insufficient to satisfy all its obligations to its creditors. Accordingly, it is expected that no distributions will be made to holders of common stock and the common stock will be extinguished upon consummation of the Chapter 11 plan."

Bloomberg: "Evergreen Solar Seeks Bankruptcy Protection With Debt of $486.5 Million" ($ESLR)

Evergreen tried to exchange some notes for new debt and “ultimately was unable to implement any alternative remedy to its financial condition,” the company said in court papers.

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.

Evergreen Solar ($ESLR) Files Notification of Late Filing of Second Quarter Results

Evergreen Solar filed this Notification of Late Filing today:

As previously disclosed on May 12, 2011, Evergreen Solar, Inc., a Delaware corporation (the “Company”), has been in negotiations with the holders of its 13% Convertible Senior Secured Notes due 2015 to restructure its existing debt. As a result of these negotiations, the Company has been required to devote a substantial portion of its personnel and administrative resources, including the personnel and resources of its accounting and financial reporting organization, to matters relating to the negotiations. The efforts associated with these ongoing discussions have caused a delay in the ability of the Company to close its books and records, finalize its operating results and prepare its financial statements for the quarter ended July 2, 2011. For these reasons, the Company has not been able to file its Report on Form 10-Q for the quarter ended July 2, 2011 (the “Quarterly Report”), within the prescribed time period. Management is diligently working to close its books and records and prepare financial statements as soon as possible with a target of filing the Quarterly Report within the grace period prescribed by Rule 12b-25 under the Securities Exchange Act of 1934, as amended.

Interesting. Are they not in negotiations with the holders of the unsecured notes? Regarding the grace period:

The subject annual report, semi-annual report, transition report on Form 10-K, Form 20-F, Form 11-K, Form N-SAR or Form N-CSR, or portion thereof, will be filed on or before the fifteenth calendar day following the prescribed due date; or the subject quarterly report or transition report on Form 10-Q or subject distribution report on Form 10-D, or portion thereof, will be filed on or before the fifth calendar day following the prescribed due date;

I imagine a more substantive announcement will be forthcoming?

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?

Another Disappointing Quarter for PV Solar Firms

It's earnings season, and we are seeing another disappointing quarter for photovoltaic solar panel makers. Subsidy cuts in European countries have crushed demand for PV panels, resulting in a glut of capacity in the industry.

SunPower missed estimates, but now that it is majority owned by Total it will have a leg up on the competition.

The Greentech Solar blog has some very intelligent commentary about the dynamics of the PV solar industry.

Go to a show like Intersolar. You'll see rows and rows of nearly identical crystalline panels. Solar panels in some ways have become the energy world's equivalent of flash memory chips: technically challenging products to manufacture that get sold like commodities. Staying in the market means spending billions to just break even: at some point, it's not longer a business for some manufacturers. It's more like a bad gambling habit.

The economics surrounding panels helps explain why balance-of-system costs will soon account for more of the cost of a solar system than the panels themselves.

The small cap PV solar stocks where the marginal buyers are retail are not being priced correctly.

Evergreen Solar ($ESLR) Announces That It Will Miss Interest Payments Due Today

The company put out the press release after hours tonight - the stock is down 15% after hours as of this writing.

On July 14, 2011, the Board of Directors of Evergreen Solar, Inc. (the “Company”) determined that in light of its current liquidity and capital resources, it will not make the interest payments due on July 15, 2011 to the holders of its 4.0% Senior Convertible Notes due 2013 (the “Senior Convertible Notes”) and its 4.0% Convertible Subordinated Additional Cash Notes due 2020 (the “Senior Subordinated Notes” and, collectively with the Senior Convertible Notes, the “Senior Notes”) under their respective indentures. The amount of interest due is $4,076,120 with respect to the Senior Convertible Notes and $90,444 with respect to the Senior Subordinated Notes.

Under each indenture, the failure to pay interest, if continued for 30 days, will constitute an Event of Default. Accordingly, if the Company has not made these interest payments by August 15, 2011, U.S. Bank National Association, as Trustee of the Senior Notes, or the holders of at least 25% in principal amount of each class of the outstanding Senior Notes, will then have the right to provide an acceleration notice to the Company declaring the principal and unpaid interest on all the applicable Senior Notes due and payable.

The Company’s total outstanding obligations, including accrued but unpaid interest, as of July 15, 2011, under the indenture governing the Senior Convertible Notes are $207,882,120 and under the indenture governing the Senior Subordinated Notes are $5,590,444. In addition, if the Company fails to make these interest payments before the expiration of the grace period on August 15, 2011, the Senior Notes are accelerated and if such acceleration has not been rescinded within 30 calendar days, such events shall result in an event of default under the indenture governing its 13% Convertible Senior Secured Notes due 2015 (the “Senior Secured Notes”).

This would then allow U.S. Bank National Association, as Trustee of the Senior Secured Notes, or the holders of at least 25% in principal amount of the outstanding Senior Secured Notes to provide an acceleration notice to the Company declaring the principal and unpaid interest on all the Senior Secured Notes due and payable. As of July 15, 2011, there was $170,362,500 outstanding under the indenture governing the Senior Secured Notes, including both principal and accrued but unpaid interest.

As previously disclosed, the Company is continuing to aggressively pursue opportunities to address its excess debt and debt service requirements in the near term, including a significant restructuring of its existing debt, and is in discussions with holders of its debt in connection therewith, in order to significantly deleverage and better position it to execute its strategy of developing and supplying the lowest cost industry standard sized wafers to the world’s leading solar panel manufacturers.

The interest payments due are on the company's senior unsecured notes. However, if they fail to make the payments it will eventually put all of the company's notes into default - totaling ~$377 million.

Evergreen Files 8-K After Hours With Status Update ($ESLR)

Evergreen Solar shares were inexplicably up ten percent today. Historically, it has always paid to sell the rips when this thing rallies on no news. [Plus, no action in the bonds.]

True to form, after hours they release this 8-K, Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing, which contained the following:

As previously disclosed, the Company is continuing to aggressively pursue opportunities to address its excess debt and debt service requirements in the near term, including primarily restructuring its existing debt, in order to significantly deleverage and better position it to execute its strategy of developing and supplying the lowest cost industry standard sized wafers to the world’s leading solar panel manufacturers. As part of these restructuring efforts the Company has engaged financial restructuring advisors, and is in discussions with holders of its outstanding convertible notes regarding the terms of a restructuring. The Company can make no assurances that it will be able to successfully restructure its debt, but its current expectation is that, in order to significantly deleverage its balance sheet, any restructuring will involve very significant or complete dilution to the Company’s existing stockholders, leaving them with a very small percentage of the Company’s outstanding common stock, if any.
[...]
If the Company does not complete a restructuring of its outstanding indebtedness, to the extent that its cash balance decreases over the next 12 months (the Company’s cash balance on July 2, 2011, the end of its second quarter, was approximately $55.9 million) or it is required to offer to purchase its outstanding notes following a “fundamental change,” or if an event of default otherwise occurs under the indentures governing the Company’s outstanding notes that results in acceleration of the notes, the Company will not have the cash on hand to make the payments required by the indentures and may be forced to declare bankruptcy. If the Company files for bankruptcy protection, it expects current stockholders will receive little or no recovery and, if the Company cannot agree with the holders of its outstanding indebtedness on a plan of reorganization, the Company may be forced to liquidate.

Wow! Not only do they mention bankruptcy but also liquidation. Of course, bondholders are praying for liquidation, and it would be great for them if the company would give up and toss them the keys.

Peculiar Market Inefficiency: Worthless Stocks That Refuse to Go to Zero

One of the most peculiar market inefficiencies is that the common stock of firms where the equity is clearly worthless will still persistently trade for long periods of time at positive values.

A classic example is General Motors. After the bankruptcy, the "old" General Motors changed its name to Motors Liquidation Company and sold its assets to a brand "new" GM, leaving the liabilities at the "old" GM. The "old" GM shares continued to trade, and the market could not quite grasp that the shares were worthless, even with lots of help from the company:

Management continues to remind investors of its strong belief that there will be no value for the common stockholders in the bankruptcy liquidation process, even under the most optimistic of scenarios. Stockholders of a company in chapter 11 generally receive value only if all claims of the company's secured and unsecured creditors are fully satisfied. In this case, management strongly believes all such claims will not be fully satisfied, leading to its conclusion that the common stock will have no value.

In October 2009, the shares still traded for about 60 cents each, which was a market capitalization of about $370 million. How can anyone believe in the semi-strong or strong efficient market hypothesis when this statement from a company fails to drive the share price to zero?

Evergreen Solar has warned investors that

"in order to significantly deleverage its balance sheet, any restructuring will involve very significant dilution to the Company’s existing stockholders, leaving them with at most a very small percentage of the Company’s outstanding common stock."

Putting aside the fact that this was an obvious outcome six months ago, shouldn't the stockholders now admit defeat? Especially now that the unsecured notes have traded at ten cents on the dollar, implying hundreds of millions of dollars in losses for bondholders? Yet the equity valuation is still in the eight figures - as much as the market value of the unsecured notes!

But, the efficient market adherents cry, maybe there is option value in these seemingly worthless shares, i.e. some chance, however remote, that they will receive a distribution? I don't think so. As Moyer writes in Distressed Debt Analysis, "in many of these situations, it is difficult to believe that a knowledgeable investor could sincerely believe there are scenarios which could occur, with sufficient probability to merit serious discussion, where the equity could have fundamental value." (p 50)

In fact, "the reality, based on the observation that many reorganizations have left stockholders with no recovery and yet the stock trades at positive values very late into, if not at the conclusion of, the reorganization, is likely that the buyers of the stock were simply wrong." (ibid)

So, why don't the vast majority of existing equity holders simply admit they made a mistake and sell the stock at whatever positive value can be obtained? A recent Businessweek article about a retail purchaser of shares in the defunct Blockbuster sheds some light on this situation.

Becker says he did not realize that the stock could end up worthless. He can't believe there was nothing on his screen to differentiate Blockbuster from other stocks he buys on E*Trade: "It's a different category than normal risk," he says. "If it's foreseeable shares would go to zero, I would think the powers that be would flash something—some kind of warning."

The investing thesis of many retail investors is: "The stock market is a playground. People make money by getting lucky. Someone else will do the work for me, for free."

All you need is one good counterexample to shoot a hole in the efficient market hypothesis, and this is a glaring one. I believe that this market inefficiency persists due to widespread investor ignorance, and the difficulty of shorting ultra small capitalization or very low priced stocks - which is that the stocks of worthless companies are before they go to zero.

All the same, it is good to know about this inefficiency. It is a great instant rebuttal of the EMH, plus there are situations where it is an investible inefficiency, for example our capital structure arbitrage trades.

 
Further reading. I am having trouble finding copies of these papers, but here are some citations on the topic:
Emshwiller 2002
Bonnier and Bruner 1982
Clark and Weisenstein 1983 "the behavior of common stock of bankrupt firms"
Morse and Shaw 1988
Shane 1994 ''Co-movements of Low Grade Debt and Equity Returns of Highly Levered Firms''

"It's Friday, Friday" Links

Internet Bubble

• P, LNKD: "Both stocks are below what traders (I don’t think many investors got involved here) could buy them for on the open market. Both are also still massively overpriced and have much further to fall."
• Ballsy Pandora Analyst Has Guts To Say "SELL"
• Falky: "whenever there are options available on stocks that are hard to borrow you have a large number of investors behaving suboptimally"

Trade Ideas

• The USG Corp 6.3%s of 2016 have fallen from 97.5 to 92 since the beginning of June - losing almost a year's worth of interest. Meanwhile, the stock is flat. One of these things is not like the other...
• Great long/short energy idea: "A practical trading application of this strategy would be to long a cost leading solar pv company and short a cost lagging solar pv company."

Other Reads

• Great KK article: "The Clock in the Mountain"
• For a New Liberty: The Libertarian Manifesto - Murray N. Rothbard

Incipient Crash

• "My personal history in Chess is only here to describe when one should give up. My view is that the EU should give up on the Euro, and plan now for its demise, going back to individual currencies for each nation. The experiment has failed. Topple the King."
• Art Cashin Compares This Week's Action To The Days Before Black Friday.
• Angry bull: "It must feel good to know that your cynicism and just-prudence is now paying dividends. Just know that betting against the market and the men with guns only works for so long. The game is rigged against the rational, the libertarian, the Austrian." Hmmm.. I guess the game may be "rigged against" me, but it hasn't stopped me from making money...

Friday Links

ESLR

• Evergreen Solar loses tax breaks worth millions
• Businessweek: Why People Buy Stock in Bankrupt Companies.

  Becker says he did not realize that the stock could end up worthless. He can't believe there was nothing on his screen to differentiate Blockbuster from other stocks he buys on E*Trade Financial (EFTC): "It's a different category than normal risk," he says. "If it's foreseeable shares would go to zero, I would think the powers that be would flash something—some kind of warning."

  This is a perplexing academic finance question - I'm working on a longer article about it.
  

TLT

• Financial Times article on extending Treasury maturities.
• Is The Treasury Market's Inflation Forecast Flashing A Warning? The warning is deflation.

Europe

• AIB sub debt is getting jammed.
• ZH: Norway Stops Aid Payments To Greece. Yield on the Greek 10 year up 57 bps today!
• CO: I believe that we are likely to see a Greek default in the months ahead.

Groupthink
ZH: MSFT is the new "hedge fund hotel"

Wunderlich: Evergreen Solar (ESLR) Shareholders "Will Be Wiped Out"

"This is the bond holders taking over. Equity holders will be wiped out and bondholders will get pennies," said Wunderlich Securities analyst Theodore O'Neill.