Barring any other unknown private deals, this is only the second renminbi-linked CB available to international investors after Hong Kong-listed Hopson Development in January issued $225 million worth of bonds denominated in the Chinese currency. Those bonds too were settled in US dollars to get around the fact that the renminbi isnÆt fully convertible.
ReneSola, which is listed in London but has its manufacturing base in ChinaÆs Zhejiang province, chose to issue the bonds in its functional currency to avoid the mark-to-market accounting that would be necessary for the equity option of the CB if it was linked to any other currency. A mark-to-market treatment could potentially make the companyÆs earnings more volatile.
According to a company release, ReneSola sold Rmb928.74 million of CBs ($120 million) with the help of Deutsche Bank. The deal comprised a base size of $100 million and an upsize option of $20 million, which was exercised straight away, sources said.
The bonds have a five-year maturity, but can be put back to the issuer after three years at a 2.125% yield. In the meantime they will pay a 1% annual coupon.
The bonds are convertible into common shares of the company at 25% premium over TuesdayÆs closing price of ú4.80, which gives a conversion price of ú5.88. If fully converted, the new shares will represent 9.5% of the existing share capital. There is an issuer call after two years, subject to a 130% hurdle to force early conversion if the share price continues to perform strongly.
ReneSola listed on LondonÆs Alternative Investment Market as recently as August last year, but its share price has already multiplied more than six times from the IPO price of ú0.79. Most of the gains have come since late November when the company said it will expand its production capacity of wafers more than initially planned during this year to meet additional demand primarily from its existing customers.
The stock soared 16.6% to ú2.67 on the day of that announcement (November 30) and shot up another 78% over the next five days when a management roadshow to meet investors in the US and a ôbuyö recommendation from Merrill Lynch provided additional support.
ôChina is already the worldÆs third largest global solar cell and module producer, but is conspicuously light in polysilicon production and relatively light in ingot and wafer production as well. This presents a unique growth opportunity for ReneSola, who is focused exclusively on solar ingot and wafer production in China,ö Merrill analyst Tien Yu Sieh said in a report at the time. He accompanied the buy recommendation with a 12-month target price of ú8, suggesting huge upside for the share price.
Such estimates also make a conversion premium of 25% look almost timid.
The stock hit a closing high of ú6.39 on February 26, before starting to retreat slightly. Still, the company, which was founded only in 2005 and raised $50 million by selling one third of its issued share capital at the IPO less than eight months ago, now has a market cap of $958 million.
According to sources the CBs were issued with a minimal amount of documentation and, as is common with these types of private transactions, placed with a small number of investors. There was no information on who these investors were, except that they included the ôusualö anchor investors. People close to the deal also said the bonds had been placed ôin a manner that is typical of private placementsö which suggests Deutsche Bank may have bought a portion of the deal.
Several of the privately placed or pre-IPO CBs issued in recent months have included such a ôproprietaryö element alongside, which is believed to help instill confidence among other investors on the basis that the arranging bank wouldnÆt buy into the issue if it was too expensive or it didnÆt believe in the company. Only last week, Merrill Lynch (through two separate entities) bought $70 million of a $200 million private CB issued by Mainland property developer Skyfame Realty that went to a total of six investors.
Deutsche Bank declined to comment.
Given the small number of investors and the private nature of the transaction, few details were available on the underlying valuations of the deal, but market sources said it was likely to have been priced off a credit spread of 250 to 300 basis points based on other sector benchmarks. The top end of that range would have given a theoretical bond floor of 95% or just below, but this would likely have mattered little to investors who would have bought this company for the equity story.
The company had initially planned to expand its production capacity of wafers to 180 MW by the end of 2007 from 125 MW six months ago, but said in late November it will now increase that even further to 265 MW.
According to Merrill Lynch, the company is on track to grab a global market share of 6% of the solar wafer market by 2008.
ôWhile competition amongst cell and module makers may intensify, more Chinese solar IPOs make for a more transparent industry backdrop, financially stronger customers and improved demand for ReneSolaÆs wafers,ö Merrill said in a second report published in January.
ôAgainst cautious expectations set in 4Q06 against a backdrop of a seasonal slowdown and concerns of excess inventories, the business outlook (for the global solar market) for 2007 appears to be healthy with good order flow and firm pricing,ö it added.
Consensus estimates suggest the companyÆs revenues will increase to $300 million this year from $87.4 million in 2006. Net profit is expected to triple to $74.4 million from $23 million last year.
In addition to the money raised from the CB, ReneSola said yesterday that it is also in talks with certain banks, including Deutsche Bank, regarding a potential loan for working capital purposes.
The companyÆs share price gained 0.8% to ú484 yesterday in the wake of the CB issue.
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