Evergreen may terminate capped call transaction with Lehman Brothers, demands return of loaned shares

By Rebecca Melvin

New York, Sept. 18 - Evergreen Solar Inc. may terminate a capped call transaction with Lehman Brothers OTC Derivatives Inc. that was part of its convertible note offering priced in July, and seek a similar arrangement with a new counterparty, the company stated in a filing with the Securities and Exchange Commission Thursday.

Evergreen also said it has given notice demanding the prompt return of 30,856,538 shares under a share lending agreement.

Lehman Brothers Inc. was the lead underwriter of Evergreen's $373.75 million of 4% senior convertible notes.

Under the capped call transaction, Evergreen still owes Lehman Brothers OTC Derivates $28.6 million out of a total $68.1 million premium for the capped call transaction. Evergreen has already paid Lehman $39.5 million for the transaction.

Evergreen said that the possibility of replacing the capped call arrangement stems from Lehman Brothers Holdings Inc.'s Chapter 11 bankruptcy announced Sept. 15.

While Lehman Brothers OTC was not included in that filing and has not filed for bankruptcy protection, the bankruptcy filing of Lehman Brothers Holdings, which is a guarantor under the capped call transaction, is an event of default under the transaction, Evergreen said.

If the transaction is terminated, Evergreen has the right to monetary damages from Lehman Brothers OTC in an amount equal to the replacement cost of the transaction.

If it doesn't implement a new capped call, then the dilutive impact of conversion of the notes may be greater, based on the actual conversion price of $12.11 per share, as opposed to the current effective conversion price of $19 per share, the company said.

Demands return of stock

In addition to the capped call transaction, Evergreen also entered into a stock lending agreement with Lehman Brothers International (Europe) to facilitate the notes offering. Under the agreement, it loaned 30.86 million shares.

The company said it understands that Lehman Brothers International (Europe) has been placed under administration in the United Kingdom, which is the equivalent to bankruptcy protection in the United States.

Evergreen said it has the right to demand the prompt return of all outstanding borrowed shares in the event of default of Lehman Brothers International (Europe), including insolvency, and it provided notice to Lehman Brothers on Wednesday.

Under the share lending agreement as it currently stands, Lehman Brothers International (Europe) was able to sell the shares into the market at market prices or at negotiated prices, and it is required to return the shares to Evergreen when the convertibles mature in 2013.

There are three other companies that entered into similar share lending agreements with Lehman Brothers. They include JA Solar Holdings Co. Ltd., SunPower Corp., and Great Atlantic & Pacific Tea Co. But the list of companies that have capped call transactions with Lehman Brothers is much longer, and includes most recently SBA Communications Corp., Central European Media Enterprises Ltd., Penn Virginia Corp., VeriFone Holdings Inc., Iconix Brand Group Inc., and Lawson Software Inc.

EMC Corp., Nabors Industries Inc., and Amgen Inc. also entered into capped call transactions with in Lehman in association with convertible bond offerings in 2006.

A syndicate source tied to several of these deals said it remained unclear how the arrangements would be treated. "It is not entirely clear right now, given the bankruptcy and the fact that the broker is now being sold to Barclays, and what will be a trigger to unwind," the source said.

In regard to the share lending agreements, the worst case scenario is that the shares may be counted as outstanding," the syndicate source said.

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