Suntech Issues Convertible Debt: An Investor's Take

Wouldn't it just figure that right after I put up an article saying I wasn't planning on following Suntech's (STP) every move, the company goes and does something that I pretty much have to write about. Anyway, just in case you didn't catch it, Suntech issued $425m of convertible debt that was priced today.

The terms are: debt is due 2012, interest rate is 0.25%, and the conversion price is roughly $48.76.

According to its press release, Suntech plans to use the funds as follows:

• $150m to expand PV and thin film production lines and increase R&D
• $100m to secure raw materials
• $100m to repay the bridge loan that the company took out to purchase MSK
• the rest for general corporate purposes

Good? Bad? To be bullish on Suntech at all, you have to believe that solar power is going to become a major component of power generation going forward - the same belief you have to have if you're going to invest in pretty much any of the solar players. Okay, you don't have to believe that solar is going to dominate energy generation, but you have to have a good feeling about it growing its current piece of the energy pie. Don't worry, you can have doubts about it (I have mine), but it's about weighing probable outcomes.

Now if solar doesn't deliver on the promise, the whole sector is screwed ('scuse my French) - so who cares about the darn convert. However, if solar does deliver, then its going to be the companies that won on the landgrab early on. Those guys won't necessarily be the long term winners down the road, say, ten or fifteen years from now (those will be the ones who come up with the best technology), but they will be the early winners. Landgrab requires cashola.

The interest rate on the notes is good, and you've got a 32% conversion premium over five years, which is okay. The important part is that they now have cash to make sure that they can expand production and have adequate silicon supply on hand. The interest rate on the bridge loan that they're paying off was only 0.75%, but they only had a year on that anyway. Given how profitable the company is, I'm not concerned about the interest. Sure, dilution isn't ideal, but I'm much more worried at this point about the company not executing than about dilution (no, that does not mean it would be okay for them to start selling stock like crazy).

SunPower (SPWR) recently did a convert deal, albeit for a much smaller $175m principal amount. Why smaller? For one, SunPower is smaller than Suntech by a decent amount. For the first nine months of 2006, SunPower did $162m in revs, versus $381 for Suntech. Also, the terms that SunPower got weren't as attractive - they got the $175m at 1.25% interest rate with a 20 year term and a smaller conversion premium of 28%. Also interesting regarding SunPower is the fact that the stock is already so heavily shorted that the company concurrently lent some shares to Lehman (LEH), most likely to allow the convert investors to hedge their position.

The bottom line is that I think this will help Suntech move forward full speed.

Disclosure: Author owns shares in Suntech.