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There has been a 55 percent rally in Evergreen Solar (ESLR) common stock since mid-April. This happened on no news (what good news could there be?) and at the same time, the company's secured and unsecured bonds hardly traded. Certainly, if there was good news, you would expect the yield on the secured, convertible bonds to be less than fifty percent.

The only explanation I had was that some seriously uninformed money had sat down at the Evergreen Solar poker table. You can see that they were "tweeting" and "stocktwitting" about buying the stock, even though they had no clue about the fundamentals. Since the stock rallied so much and the bonds were still cheap, the only thing that made sense was to add to the trade: Buy more bonds and short more stock.

Yesterday after hours, the company pre-announced results for the first quarter. Shipments were down hugely compared to the previous quarter, and the company's cash has been drawn down to only $33 million. Here is the most important part of the press release:

As a result of our low year to date sales volume and potentially slower sales for the remainder of this year as the industry balances inventory levels, along with significantly increased pricing pressure, the cash that we had previously expected to realize through the reduction in accounts receivable and inventory from our recently closed Devens facility will be less than expected and will take longer than expected to realize. Therefore, our near term liquidity has been negatively impacted and may require us to secure additional sources of cash sooner than expected. Accordingly, we will continue to aggressively pursue opportunities to address our capital structure in the near term, including restructuring our existing debt.

You can see that the stock is down twenty percent after hours, and will probably take out new lows.

My guess is that they will announce a new exchange offer, one that is much more generous to bondholders, because they have no choice. They should offer to exchange the four percent unsecured notes for 95 percent of the equity of the company. They should also offer to exchange the 13 percent secured notes for new secured notes due in 2016 with a four percent coupon and an at-the-money conversion price.

That would result in the existing equity being completely obliterated, but it would give the company breathing room and a chance to survive.

Source: Evergreen Solar Pre-Announces Q1 Results: Expecting New Lows