Evergreen, JA Solar Struggle with Lehman Linkage

Evergreen Solar (ESLR) shares were down sharply today, in a move that may be tied to a convertible offering the company completed in June that included a hedging transaction involving Lehman Bros. (LEH).

The company in June priced $325 million of 4% senior note due 2013, with a green shoe covering another $48.75 million. In connection with the deal, Evergreen agreed to lend Lehman, which was the underwriter for the deal, 30,856,538 shares for hedging transactions; Lehman planned to sell the shares to clients, with no proceeds to Evergreen. So here’s the kicker: the arrangement called for Lehman to cover the shorts when the notes came due. But Lehman today filed Chapter 11, which has apparently lead the Street conclude that Evergreen will now be just one more creditor. That would be one mammoth hit if that’s how it plays out; it would be the equivalent of issuing all of those shares effectively for free, in one massively dilutive transaction. Ouch.

ESLR today was down $1.74, or 27.62%, to $4.56.

In a statement late this afternoon, Evergreen said that the stock was lent to Lehman affiliates that have not filed for bankruptcy protection and that the agreements covering the shares “are structured to provide Evergreen Solar with as much legal protection as is customarily available in transactions such as these.” CFO Michael El-Hillow said in the statement that “while the ultimate impact of the situation is expected to unfold over the next few months, we are availing ourselves of all legal remedies to protect our Company and its shareholders in this very fluid situation.”

Meanwhile, it looks a similar problem has hit JA Solar (JASO), which raised $300 million in a convertible deal in May in which it entered a stock-lending deal as a part of a hedging transaction with the co-book runners on the deal - Lehman and Credit Suisse (CS). While it is unclear exactly how many shares the company issued in the stock lending transactions, it also seems clear that repayment of those shares lent to Lehman is an iffy proposition at best.

JASO today fell $2.64, or 20.15%, to $10.46.

Comments

[gebby:]

explain why it is iffy.

2008 Sep 16 10:22 AM