More A123 Systems Stuff ($AONE)

The company put out an 8-K today describing an amendment to the 6.00% Senior Convertible Notes due 2013, which changes certain terms of the Notes in connection with the WX financing deal.

Among other things, the Consent and Amendment increased the conversion price of a portion of the Notes at all times on or after August 21, 2012 from 85% of the market price thereof (as was previously provided for such the Notes under their original terms) to 87% of the market price thereof. In consideration of the foregoing, the Consent and Amendment changed the first date on which the holders of the Notes may convert up to $30 million of the Notes into shares of Common Stock at a 15% discount to the market price thereof from August 15, 2012 to August 10, 2012.

That was the worthless summary from the 8-K. One of the changes is as follows:

The Holder may, at any time and from time to time on or after August 10, 2012, notify the Company by so indicating in one or more Conversion Notices of its election to convert all or any portion of the outstanding and unpaid Conversion Amount using a floating rate conversion price equal to (a) for each Trading Day from and including August 10, 2012 to and including August 20, 2012, 85%, and (b) for each Trading on or after August 21, 2012, 87%, of the Closing Sale Price of the Common Stock on the Trading Day immediately preceding the applicable Conversion Date (the “Floating Rate Conversion Price ”) in lieu of the Conversion Price then in effect.

The difference appears to be that in the previous version the conversion could take place only after August 15. So, for some reason, they've made it possible for the holders to convert five days earlier. And encouraged them to do so, because the discount to market price (15%) goes down slightly on Aug 21. Interestingly, an enormous number of shares traded today. If $50 million of debt is converted to stock at a 15% discount to  current prices, that will mean issuing close to 100 million new shares. That will be really good for the long bond/short stock trade. The other major change was to add this provision:

REDEMPTION AT THE OPTION OF THE COMPANY. At any time on or after the date the Company consummates the transactions contemplated by the Bridge Facility and the New Convertible Notes, whereby the Company receives proceeds of at least $225,000,000 (the “ Requisite Financings ”), the Company shall have the right, upon not less than twenty (20) Business Days’ nor more than thirty (30) Business Days’ prior written notice via facsimile and overnight courier, which notice shall be irrevocable (a “ Voluntary Redemption Notice ”), to redeem all (but not less than all) of the outstanding Notes; provided that no such redemption shall be consummated prior to the date on which the New Convertible Notes are issued (but, for absence of doubt, the Voluntary Redemption Notice may be provided (on an irrevocable basis) prior to the consummation of the Requisite Financings for a redemption being completed no earlier than the consummation of the Requisite Financings). Each Note subject to redemption by the Company pursuant to this Section 32 shall be redeemed by the Company in cash by wire transfer of immediately available funds at a price equal to the sum of (a) the aggregate principal amount of the Note, (b) the aggregate principal amount of the Note multiplied by the Voluntary Redemption Premium and (c) accrued but unpaid interest on such aggregate principal amount of Notes (the “ Voluntary Redemption Price ”). The “ Voluntary Redemption Premium ” is equal to 10.00%. Redemptions required by this Section 32 shall be made in accordance with the provisions of Section 12. Notwithstanding anything to the contrary in this Section 32, but subject to Section 3(d), until the Voluntary Redemption Price (together with any interest thereon) is paid in full, the Conversion Amount subject to redemption under this Section 32 (together with any interest thereon) may be converted, in whole or in part, by the Holder into Common Stock pursuant to Section 3.

It's not clear why the company would want to redeem this debt in cash - at a 10 percent premium - rather than having it converted into stock. But maybe they just wanted to leave themselves the option. If the holders don't convert to stock (it's not clear why they wouldn't, since they make an instant 15%), then this allows the company to redeem the remaining debt.

What's funny is that none of the discussions of this deal - even the ones that are close to being accurate - are addressing these issues. For example, he says that "a substantial portion of the cash [from the WX deal] will be used to redeem or repurchase A123's other debt securities." I highly doubt that.

It seems much more likely that the existing debt will be converted to stock. That would explain why the WX deal is very clear about provisions to protect them from dilutive transactions.