Thursday, August 9, 2012

Summary of A123 Systems News ($AONE)

The total revenue for the second quarter was $17.0 million, which was a decrease of 53% from the previous year. AONE talks about its "gross loss" because it has a consistently negative gross margin, and the gross loss for the quarter was $29 million, compared with $17.5 million the previous year.

The share count is currently 172 million, so the market cap is actually $86 million not the $74 million shown on various websites.

The much vaunted deal has two major components, first is the Bridge Loan Facility and Bridge Warrants. There's a strike price of $0.425 on those warrants that come with the 10% interest, 2-year senior secured loan. And how about the "subject to reduction to $0.17" feature, if the certain government grants go away? Is there maybe a chance that the DOE grant will go away now that the company is in the clutches of a Chinese company? Much of the value of this company is the future DOE money, and WX cleverly insisted on provisions protecting them in case those grants are cancelled.

This looks more like a hard money convertible loan where the lender can short the stock at the money (thanks to the conversion options and warrants) to protect its position.

The second part of the deal is the Senior Secured Convertible Notes and Warrants. So the new convertible notes wouldn't mature until 2017 and the old sub notes are due in 2016. That's why they have to retire the old notes. The 90% requirement and all the anti-dilution provisions regarding the warrants are dead giveaways that this is going to be an exchange offer.

The major question is how the sub notes are going to be repurchased/retired to satisfy that part of the MOU. Obviously, AONE isn't going to be calling them at par! They could do open market purchases at the current distressed price. However, that would still cost about $50 million, and cashing out other creditors presumably is not what WX signed up for. That leaves a distressed exchange / debt for equity swap. A big clue is that the MOU calls for 90% of the subs to be retired, which is a common threshold in exchange offers. I could see these notes being given something like 10 cents of cash plus stock to induce them to tender.

The stock component of the distressed exchange would need to basically wipe out the existing equity, though. If the entire WX deal needs to happen by the end of the year, than the distressed exchange needs to happen really soon. This could be why the stock tanked at the end of the day and the subs rallied from low 20s to 31.

Conclusion: the relative valuations of the subs and stock are still inconsistent. In order to bring in the new capital, the subs need to be given a tip to go away, and the current equity needs to get totally shafted. At a $50 million market value of the bonds and $75 million market cap, the market prices don't reflect this.

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