Trina Solar, an integrated Chinese solar power company involved in the production of ingots and wafers as well as solar cells and modules, raised $160 million from a follow-on offering at the end of last week, becoming the first US-listed solar power company to raise fresh capital in the equity markets this year.
The company is cash-rich (at the end of 2009 it held $406 million of cash and cash equivalents) and has enough funds to cover its capital expenditure this year, which made the timing of the deal somewhat opportunistic. Some observers welcomed the fact that the company was making an early move to secure funding for its expansion in 2011, while others argued that the unexpected deal signalled a concern by the management that the market for solar power products may deteriorate later this year or that it would not be able to obtain the necessary bank funding to refinance $267 million in short-term debt coming due by the end of 2010.
In its fourth-quarter conference call, Trina said it would have capital expenditure of $250 million to $280 million this year.
With the capital raised towards general expansion, rather than, for instance, an acquisition that would be immediately earnings accretive, the share price also traded down 11% on Thursday while the deal was being marketed. The extent of the sell-off matched the dilution of the share capital and sources said this was in line with other follow-on transactions in the US over the past six to eight weeks, which have also caused share prices to adjust downwards to account for the issue of new shares.
Irrespective of that drop though, Trina was able to sell the shares at a significantly higher price than when it last sold new shares in August 2009, thanks to a strong share price rally between then and early January. Based on the selling price in July, this deal came at a premium of approximately 41%. The share price recovered slightly on Friday, gaining 3.7% to $21.30.
Trina sold 7.9 million American depositary shares (ADS), or 11.3% of the existing share capital. The deal was announced after the US market closed on Wednesday and priced 24 hours later at $20.25 -- a tight 1.4% discount to Thursday's closing price of $20.54. There is a 15% overallotment option that could increase the total proceeds to $184 million.
The deal was arranged by Barclays Capital, Credit Suisse and Goldman Sachs.
Despite the scepticism among some analysts and investors towards the reasons for raising funds at this time, the deal attracted both new and existing investors, including a number of large solar specialists who hadn't invested in Trina before. All in all, more than 100 investors participated in the transaction, which was about three times covered.
The order book included long-only money accounts as well as momentum players. As usual for US-listed companies, US-based investors took the bulk of the transaction; in this case their share (which included a number of Canadian long-only investors) was estimated at more than 80%. Asian and European investors covered the rest.
Being an integrated player that covers the entire spectrum of the solar power value chain and one that has one of the most solid balance sheets in the industry, Trina is well liked and respected in the market (it obviously doesn't hurt that its share price gained 480% during the course of last year either). And sources say investors who participated in the transaction were generally positive about the company taking the lead among its peer in terms of adding to its coffers ahead of what is expected to be a period of uncertainty in the solar power industry.
Indeed, given that the industry is all about size and access to capital for further expansion, Trina's deal is expected to be followed by several other deals by listed industry players.
A key issue of concern for industry players and investors alike is Germany's decision earlier this year to slash its so-called feed-in tariffs for solar power. Feed-in tariffs are the price utilities are obliged to pay to generators of renewable energy to make up for the fact that renewables are more costly to produce than fossil fuel-based power. The reduction of these subsidies is expected to have negative consequences for the German solar industry, and on the manufacturers of solar cells and modules.
Germany is one of the largest solar power markets in the world and accounts for at least 50% of the worldwide photovoltaic market, according to analyst estimates. At the time of the announcement of the tariff cuts in January, Reuters quoted an analyst at DZ Bank, Sven Kuerten, saying that he expects the German solar market to shrink by at least 25% in volumes and 40% in revenue in 2010 due to the government's move. Feed-in tariffs for new roof-mounted solar power will be cut by 15% from April, followed by a cut in the tariffs for solar energy generated from open field and farmland sites by 15% and 25% respectively from July.
Germany is Trina's largest market, and in 2009 accounted for 34% of its sales in volume terms, followed by Italy with 20% and Spain with 12%. This year, the company expects sales to Germany to fall to 29%-31% of its total, with sales to Spain increasing by a corresponding amount. The total sales volume is expected to almost double to 750-800MW from 399MW in 2009, however.
In a prospectus published in connection with the ADS sale, Trina noted that while the developed solar power markets in Germany, Italy and Spain continue to make up the core of its solar module customer base, it has also expanded its sales into emerging solar power markets such as Belgium, China, the Czech Republic, France, Japan, Luxembourg, South Korea and the United States.
In order to meet current and anticipated demand for its products, the company intends to expand its annual manufacturing capacity of ingots and wafers to approximately 700MW this year from 500MW at the end of December, and to boost its capacity of cells and modules to between 850MW and 950MW from 600MW.
Trina plans to use approximately $100 million of the net proceeds from the ADS issue to expand its manufacturing facilities for PV cells and modules and another $50 million for research and development purposes, including the expansion of its existing R&D centre. Additional proceeds will go towards downstream projects and general corporate purposes, although the company said it will retain a broad discretion with regard to these funds and the ultimate usage may change.
The August share sale, which saw Trina raise $149 million, was conducted at a price of $14.375 per ADS, adjusted for a subsequent revision in the ADS ratio to 50 shares per ADS in January this year, from 100 shares per ADS previously.
