Wednesday, January 16, 2013

Suntech Power Bonds Due in Two Months ($STP)

The Suntech Power bond maturity date is March 15, which is now less than two months away. This bond has been trading around 50, a YTM of over 600 percent.

The silence has become deafening. What's the plan for repaying these? An exchange offer? Bailout? Or just a bankruptcy filing?

If a transaction like an exchange offer was going to take place, it would need to be set in motion well before the maturity date. There needs to be time between the announcement of an offer and the deadline - at least several weeks. There also needs to be time between the deadline and the maturity date, so that something else can be tried or the offer terms can be modified if it is not successful.

The most effective use of any bailout money would be for additional cash compensation in an exchange offer. Betting on a bailout is betting that the Chinese are stupid, and they would have to be really stupid not to force concessions from the existing equity holders as part of the restructuring.

Every day that ticks by without an announcement of an exchange offer is raising the probability of a default and liquidation. Perhaps a month before the maturity date, it would be likely that the company would default if no exchange offer had been announced by then.


TSJ said...

Wil you explain the mechanics of an exchange offer? is the debt paid at par? Will the existing equity holders be wiped out or just severely diluted? Anything you could offer would be appreciated.


CP said...

In an exchange offer, a company offers bondholders stock in exchange for their bonds.

It would tend to be highly dilutive, depending on how solvent the company is/how much debt is owed relative to the value of the equity (if the equity is even in the money).

In this case, I think an exchange offer would be highly dilutive.