I think it may be time to go long the thin-film solar company ESLR again. They issued $325 million in notes in order to finance a new thin-film solar plant in Devens, Mass. The stock got punished on fears of what might go down in the future. This is what they did:
The incentive for potential buyers is that, assuming the stock price rises by 2013, shareholders can get their convert their notes into cash and stock, said Wedbush Morgan Securities analyst Al Kaschalk.
The solar company said each $1,000 note was valued at 82.6 shares, at an initial conversion price of $12.11. Notes can be converted into cash up to $1,000, and if the stock trades above $12.11, any additional value would be paid in shares.
But this would have a dilutive impact on the company's existing shareholders by increasing the number of Evergreen shares outstanding, explained Signal Hill Group analyst Michael Carboy.
So this would be bad if their stock went above $12.11 (it is trading at $9.72) since they might be on the hook and would have to issue new stock above that price. So what they did to increase the price it would take to trigger the excess stock they:
To get around this point, Evergreen entered into a capped call transaction with an affiliate of Lehman Brothers, the lead underwriter, that will raise the effective conversion price to the company to $19.00 per share. Lehman will provide the extra stock Evergreen would have to issue should its shares trade above $12.11 and below $19.00.
So they put the dilution risk on Lehman instead of them from $12.11 to $19.00. So if this plant does turn out to be a big success then ESLR might be able to buyback some stock in order to counter possible dilution if the stock does go above $19. I think it might have been an overreaction for the stock to drop 10% like it did since dilution would be a full 10 points away and not just 3 points without this capped call.
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