Thursday, January 24, 2008

Solarfun Power (SOLF) Plunges 15% on Convertible Debt Offering

Ugh. Quite possibly the worst instrument to ever be sitting across the table from - convertible debt. Solarfun Power (SOLF) issued $150M of this stuff today, which is an open invite to short the common shares against the debt. Which means the stock goes down. This happens every time and it appears the conversion price is $19.25. Worse, it tends to provide a ceiling on the shares.
  • Solarfun Power Holdings Co., Ltd. ( Solarfun ; NASDAQ: SOLF), an established manufacturer of photovoltaic (PV) cells, modules and ingots in China, today announced the pricing of US$150 million of 3.50% Convertible Senior Notes due 2018 in a private offering
  • The notes, in certain circumstances, will be convertible into ADSs representing Solarfun’s ordinary shares (except for any cash in lieu of fractional ADSs). The initial conversion rate, subject to adjustment, is 52.2876 ADSs per US$1,000 principal amount of notes (which represents an initial conversion price of approximately US$19.125 per ADS).
  • Solarfun currently expects to use the net proceeds from the note offering for the following purposes: approximately US$60.0 million for wafer and polysilicon pre-payments, US$60.0 million for capital expenditures, US$19.0 million to repay loans from Hong Kong Huaerli Trading Company Limited, a company controlled by Mr. Yonghua Lu, Solarfun’s founder, chairman and chief executive officer, to Solarfun Power Hong Kong Limited, Solarfun’s 100% indirect subsidiary and the remainder for working capital and repayment of Solarfun’s existing bank borrowings.
  • Concurrently with this offering of notes, Solarfun is offering, in a separate offering that is registered with the Securities and Exchange Commission, up to 7,843,140 ADSs (or up to 9,019,611 ADSs if the underwriter in such offering exercises its over-allotment option in full), all of which will be effectively lent to an affiliate of Morgan Stanley & Co. Incorporated. This affiliate will sell the ADSs and will use the resulting short position to enable investors in the note offerings to hedge their investment.
I have a 2% or so position in this name - since this stock is now "cheap" and has an earnings report coming out in a month which can move the stock significantly I will await that, but under normal circumstances I cut bait immediately the minute I see convertible debt issued. It's toxic for long common shareholders in my book. That paragraph I highlighted in red explains exactly why. Only the fact this stock has the ability to rise 30% in a day leads me to hold these shares... but I am displeased in a very large way.

Long Solarfun Power in fund; no personal position

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