Wednesday, December 19, 2012

Suntech Market Inefficiency ($STP)

At 40 cents, the market value of the Suntech Power bonds (due in March) is now the same as the market capitalization of the company: $230 million.

So, bondholders feel that they are about to lose $345 milllion, while equity investors think that the stream of cash flows junior to the bonds due in March is worth $230 million.

Equity investors think that the company is worth $575 milllion more than the bond investors do.

Its hard to comprehend a set of rational beliefs where this is possible. If you really thought the equity had any value, you would buy the bonds and make 2.5x your money in the next three months. In order for the equity to be an equal or better proposition than this at the current price, you would need to think that the equity is currently trading at only 40% of its real value (i.e. $3.13).

How much is a Suntech $3 call for March? 5 cents.

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