After Suntech Power (OTCPK:STPFQ) missed its $540 million bond payment on March 15, 2013, Seeking Alpha has published a number of articles explaining why the company's shares are worthless. Despite these articles, Suntech stock has maintained some value over the last few months because equity holders are optimistic they will receive a sizable number of shares post restructuring. However, recent court documents in Suntech's involuntary bankruptcy case show definitive proof that common shareholders will almost be wiped out.
Since missing the large bond payment in March, Suntech Power has done a good job of propping up its stock price through a series of forbearance agreements and over-optimistic press releases. Even after an involuntary bankruptcy petition, initiation of provisional liquidation proceedings, and delisting by the NYSE, Suntech shares have stayed above $0.50, currently trading with a $106 million market cap.
Investors are hopeful that after the company completes restructuring with bondholders, shareholders will retain a large enough portion of the capital structure to justify current valuation. These hopes have all but been dashed by court documents filed by majority bondholder lawyer Bingham McCutchen. The Bingham McCutchen representative, Mark Fucci, submitted the completed restructuring framework agreement to the bankruptcy court on December 9, 2013. Current shareholders will be significantly diluted, receiving less than 1% of shares post restructuring.
On August 30, 2013, Suntech issued a press release announcing they anticipated entering into a restructuring framework agreement with bondholders within a week. The deal would, among other things, include the exchange of outstanding debt into the company's equity. According to court documents, the agreement was completed on September 23, 2013.
In Suntech's November 6, 2013 press release announcing its provisional liquidation filing in the Cayman Islands, the company confirmed an understanding was reached with the creditor working group. The percent breakdown of how the new shares would be allocated post restructuring was undisclosed to the investing public at the time of the press release. These details would be revealed by Bingham McCutchen in December 2013.
On December 9, 2013, Bingham McCutchen attorney Mark Fucci gave a declaration to the Southern District of New York Bankruptcy Court in Suntech's involuntary bankruptcy case. In his declaration, Fucci submitted the completed restructuring framework agreement signed by Suntech and majority bondholders. Page 4 of the deal clearly shows current shareholders will receive at most 1% of new shares after the restructuring is completed.
The following is taken from the restructuring agreement:
The Company shall issue shares to the New Investor, the Noteholders, and the IFC, resulting in the following percentage ownership of the Company's issued and outstanding shares on a fully diluted basis:
The chart shows bondholders receiving no less than 44.9% of shares in the restructuring. The bonds last traded at $11.00, which makes the total value of outstanding notes $59 million. The equity holders are only receiving 1% of shares, yet Suntech stock trades at $0.59 or $106 million market cap. This discrepancy in price proves the equity is grossly overvalued.
With a bankruptcy hearing scheduled for January 30, 2014, the company is running out of time and options. Either the court rules in favor of involuntary bankruptcy, which would force the company to liquidate and leave the shareholders with nothing. Or, if the court rules in favor of Suntech, the company will most likely file Chapter 15 bankruptcy in the United States and complete restructuring in the Cayman Islands. As shown in the framework agreement, this would leave current stockholders with less than 1% of new shares.
In either scenario, value of current shares is less than $.05.
Disclosure: I am short STPFQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.