Synthetic borrow agreements with bankrupt Lehman raise questions for four convertible issuers

By Rebecca Melvin

New York, Sept. 16 - Four convertible bond issues with synthetic borrow facilities underwritten by Lehman Brothers Inc. were a matter of investor concern after the New York investment bank declared bankruptcy on Monday.

The issues belong to Evergreen Solar Inc., JA Solar Holdings Co. Ltd., SunPower Corp., and Great Atlantic & Pacific Tea Co.

The four attempted to respond to concerns via press releases between Monday and Tuesday, but they were unable to say with any certainty what the full impact would be or whether they would be able to regain the shares lent to Lehman Brothers and whether they would have to pay for them.

Evergreen Solar, which issued $373.75 million of 4% senior convertible notes in July, saw its shares sink 27.6% on Monday and another 4% on Tuesday to $4.39 amid the uncertainty.

"They'll have to buy the shares back, but it's not certain whether they will have to pay for them," a New York-based sellside desk analyst said. "They may try to move the facility to another broker-dealer; but there are a lot of questions about it, and they don't know what is going to happen with this yet."

Currently the shares are not being counted in earnings per share because they are borrowed.

Evergreen shares plunge on Lehman tie

Evergreen, which makes solar products with string ribbon technology, loaned 30.9 million shares to Lehman Brothers International (Europe) under a share lending agreement that was aimed at facilitating hedge positions related to its stock and the bond issue.

Under the agreement, the shares are supposed to be returned to the company no later than July 15, 2013, which is the maturity date of the notes.

The company said that until that time, the shares are considered to be issued and outstanding for corporate law purposes only. More information regarding the bankruptcy proceedings is needed before the issue can be properly assessed, and until then the company won't consider the shares outstanding for reporting per share results.

"The agreements in question are with affiliates of Lehman Brothers Holdings Inc. that have not filed for bankruptcy protection and are structured to provide Evergreen Solar with as much legal protection as is customarily available in transactions such as these," chief financial officer Michael El-Hillow said in the release.

"While the ultimate impact of the situation is expected to unfold over the next few months, we are availing ourselves of all legal remedies to protect our company and its shareholders in this very fluid situation, he said.

Also related to the offering and included in net proceeds was the cost of a capped call transaction with Lehman Brothers OTC Derivatives Inc. The purpose of the capped call transaction was to reduce the ultimate dilution that would otherwise occur as a result of new common stock issuances upon conversion of the issue.

To date, the company has paid about $39.5 million for the capped call transaction, which effectively increases the conversion price of the notes from the company's perspective to $19 a share compared to the actual conversion price of $12.11 per share.

Marlboro, Mass.-based Evergreen (Nasdaq: ESLR) aimed to reassure investors saying that the majority of its cash and short term investments are held by Silicon Valley Bank, and it also has funds on deposit with two international commercial banks. It has sufficient cash to complete its 160-megawatt Devens facility and can support other operating needs in 2009, the company said.

JA Solar loaned 6.56 million shares

JA Solar closed in May its $400 million of convertible senior notes due 2013 and up to 13.126 million of American depositary shares, or ADSs. The ADSs were borrowed by Lehman Brothers International (Europe) and Credit Suisse International, affiliates of Lehman Brothers Inc. and Credit Suisse Securities (USA) LLC, who were the joint book-running managers of the notes offering.

The notes sold include $50 million aggregate principal amount of notes issued pursuant to the underwriters' exercise in full of their option to purchase additional notes.

In connection with the senior note offering, JA Solar loaned 6.56 million shares to each of Lehman Europe and Credit Suisse, and they are supposed to be returned by May 15, 2013.

"At this time, the company is unaware of the intentions of Lehman Europe with respect to the return of the 6.56 million shares attributed to Lehman Europe under the share lending agreement or whether Lehman Europe will be able to fulfill its obligation to return the borrowed shares in 2013," JA Solar said in a release.

Until further information is available, the company will continue to consider the shares not outstanding for the purpose of computing and reporting per share results.

JA Solar also entered into a capped call transaction with Lehman Brothers OTC Derivatives Inc. to effectively increase the conversion price to $37.375 per share compared to the actual conversion price of $30.475 per share.

To date, the company has paid about $16.2 million for the capped call transaction to Lehman.

JA Solar said it too will work with other investment banks to try to maintain the original intent of the capped call transaction.

In addition, JA Solar has $100 million worth of USD 3-Month LCMNER Index-Linked Note, issued by Lehman Brothers Treasury Co. BV Inc. in The Netherlands, guaranteed by Lehman.

Lehman Europe is the dealer of the note. This note is linked to the Lehman Brothers Commodity Alpha Trading Strategies I Excess Return (LCMNER) index. The maturity date of the note is Oct. 9, 2008, with 100% principal protection.

"We are monitoring the development of the Lehman insolvency proceedings closely, but based on our review of the information made publicly available by Lehman, Lehman Brothers Treasury Co. BV, the issuer with respect to this transaction, is not presently the subject of insolvency proceedings," Chief Financial Officer Dan Lui said in a release.

Lui also said that the situation is being monitored and will remain fluid for several months, but reassured investors that sufficient cash was available to complete its Yangzhou facility and support other operating needs in 2009.

He reconfirmed full year 2008 and 2009 guidance and gross margin in excess of 20% for both years.

SunPower didn't have call spread

SunPower's 1.25% senior convertible debentures due 2027 hail from February 2007 and included 2.9 million shares of common stock lent to Lehman Brothers International Europe. SunPower did not enter into a call spread or other similar arrangement with Lehman, Lehman Brothers International Europe, or Lehman Brothers Inc., however.

The share lending agreement provides that SunPower has the right to terminate the share loans and demand that the borrowed shares be returned in the event of a default by Lehman Brothers International Europe, including a breach by Lehman Brothers International Europe or bankruptcy of Lehman Brothers International Europe.

While the share lending agreement does not require cash payment upon return of the shares, physical settlement is required (i.e. the loaned shares must be returned at the end of the arrangement).

Excluding the 2.9 million class A shares lent to Lehman Brothers International Europe, SunPower had 85.74 million shares of common stock issued as of Aug. 29.

A&P loaned 2.3 million shares

Montvale, N.J.-based supermarket chain Great Atlantic & Pacific Tea Co. was the sole non-solar power company convertibles issuer affected by the Lehman bankruptcy, at least that has surfaced so far.

Lehman Europe is party to a 3.2 million share lending agreement with the company related to its $380 million convertible note offering of December 2007, the company said in a release.

Lehman is not a party to the company's indebtedness under its revolving credit agreement with Bank of America NA or its senior note obligations. Availability under the revolving credit agreement was about $160 million at the end of the second quarter ended Sept. 6 and there are no financial covenants under the company's loan agreements.

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