Last month, I mentioned that Evergreen Solar (ESLR) had announced a distressed debt exchange offer, whereby it would substantially dilute existing shareholders in order to induce the holders of its 4% and 13% convertible notes to accept new notes that had either extended maturities, lower interest coupons, or lower principal amounts.
Last week (on Jan 26), the company announced an amendment to the exchange offer. I had suspected that this would be necessary. As I wrote in my original post,
[T]he recapitalization plan is not generous enough to bondholders (especially holders of the 13% notes), and I will be surprised if it meets with much success.
We have seen this happen before in other distressed debt exchanges. I recall that Georgia Gulf (GGC) went through several iterations before it was able to induce a sufficient fraction of bondholders to exchange.
[In contrast, Callon Petroleum (NYSE:CPE) was able to have 73.5% of its notes tendered right out of the gate with the public announcement of its exchange offer in 2009. In that episode, it was surprising to me that people tendered for such a small share of the equity, and without (publicly) putting up a fight. I thought perhaps that the largest noteholders had been given confidential information that was bullish.]
Anyway, the Evergreen Solar proposal has obviously not been well received by bondholders, because the company has found it necessary to substantially sweeten the offer. Specifically,
For the existing 4% notes, the initial conversion price of the new 4% notes has been reduced from $6.00 to $4.35 per share.
For the existing 13% notes:
• the initial conversion price of the new 7.5% notes will be fixed at $4.00 per share;
• the new 7.5% notes will be secured by a first-priority lien on substantially all of our United States based assets and a pledge of certain interests in foreign subsidiaries;
• the minimum consent condition has been reduced from at least 75% of the aggregate principal amount of existing 13% notes to more than 50% of the aggregate principal amount of existing 13% notes;
• if the Company receives the consent of holders of more than 50% but less than 75% of the outstanding principal amount of the existing 13% notes, the indenture governing the existing 13% notes will be amended to permit the Company to incur the new 7.5% notes, grant a lien in favor of the holders of the new 7.5% notes and for the existing 13% notes and the new 7.5% notes to be ratably secured by a first-priority lien on substantially all of our United States based assets and a pledge of certain interests in foreign subsidiaries;
• if the Company receives the consent of 75% or more of the holders of existing 13% notes, the indenture governing the existing 13% notes will be amended to provide for the security interest and all of the collateral securing the Company’s obligations under the existing 13% notes be released and to terminate the existing collateral documents and eliminate many of the restrictive covenants and certain events of default in the indenture governing the existing 13% notes; and
• the new 7.5% notes will have the benefit of restrictive covenants similar to the restrictive covenants contained in the indenture governing the existing 13% notes.
It was particularly galling that the company was trying to strip the liens from the existing 13% notes. That is what you call a coercive distressed debt exchange offer.
The company has extended the deadlines on the exchange offers until February 9, 2011, and the company's Special Meeting of Shareholders scheduled for January 31, 2011 has been adjourned until February 9, 2011 as well.
I don't think this will be enough to get the holder of the 13% notes to accept the offer. They are being asked to sacrifice a lot (lower interest rate, extended maturity) in exchange for a conversion option that is now far out of the money.