Thursday, January 26, 2012

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

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


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


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.

1 comment:

ECD Fan said...

The Senior Notes principal is not $236 million but $263 million. The warranty reserve vastly underestimates the claims that will be coming - for example, a 3-year old 12MW installation at GM/Opel in Zaragoza, Spain is totally dead (per remote monitoring system), and a 25MW system that was supposed to be operational a year ago in Nola, Italy is still nowhere to be seen (revenues were recognized in 2010). Those are just on the tip of the iceberg - people are tearing down Unisolar rooftop installations (Florida), or simply
leaving them for the dead in the dump (the high-profile Tessman Road landfill install, per remote monitoring system), etc, etc , etc. Unisolar's modules predictably underperform vs expectations and outright fail, usually within 10 years (note that the warranty is 25-30 years).

On the asset side - The PP&E is probably worth less than $10 million - look at Solyndra's liquidation! - Unisolar's "machinas" are nothing more than scrap - they are custom built and cannot produce anything profitably. The haircut to inventory should probably be higher than 25% - Unisolar was claiming ASPs of over $1.75/Watt the last time I checked, while its 6%-7% efficient modules should not fetch more than 90c/Watt retail with a 25-year warranty (Evergreen's 14%-efficient modules were available at less than 80c/Watt retail in December!).

There are some other factors to consider. For example, the new CEO (who, by the way, is missing from ECD/Unisolar web page!) is on record claiming that high-cost companies and non-glass companies like ECD/Unisolar will fail - and he is a former salesman from the failing Abound (another taxpayer scam). The Chief Restructuring Officer, who allegedly talks to bondholders, hails from a fraud (SEC was after him for false press releases, but in their infinite wisdom dropped the matter!) and he apparently lied about the sale of the battery division (was supposed to be completed by Jan 19, 2012).

Equity is obviously worthless. But now the bonds are probably overpriced too. The perfectly orchestrated short squeeze is getting tired and exhausted after all this turnover, and equity and bonds can't stay far from fair value much longer.