Lehman Rains On Solar Stocks Too (LEH, ESLR, JASO)

The bankruptcy of Lehman Brothers (NYSE:LEH) and the ongoing counterparty risk scenario isn’t just applicable to financial stocks.  This is going to hit a couple of solar stocks pretty hard today. Evergreen Solar (NASDAQ:ESLR) looks to be taking the bigger hit, but JA Solar (NASDAQ:JASO) will also feel the pain.

At Evergreen, Lehman was the lead underwriter for a $373.75 millionsenior convertible note offering back in July. The solar company lentLehman some 30.9 million shares of new common stock in a capped calltransaction. The new shares were to be reported as "issued andoutstanding for corporate law purposes."

According to the terms of the note, Lehman is obligated to return theshares by July 15, 2013. That transaction lifted the conversion pricefrom $12.11 per share to $19.00 per share. To date, Evergreen has paid$39.5 million transaction fee.

Evergreen will have to write off the $39.5 million and, if the companycan’t recall the 30.9 million new shares, Evergreen shareholders face adilution of their stock by more than 20%. Evergreen says that it willadopt a wait-and-see position regarding Lehman’s ability to return theborrowed shares in 2013. While it’s waiting, Evergreen will notconsider the shares to be outstanding "for the purpose of computing andreporting share results."

JA Solar is in the same boat, but there’s not quite as much water init. The company lent the European division of Lehman 6.56 million newshares, also due in 2013. The original conversion price was set at$30.475/share. The capped call lifts the price to $37.375/share. JA haspaid $16.2 million in a transaction fee, and it looks like shareholdersface a dilution of about 4% if Lehman doesn’t return the borrowedstock. JA Solar also plans to treat these shares as non-outstanding.

JA also has a $100 million 3-month index-linked note outstandingmaturing on October 9th with another of Lehman’s European subsidiaries.JA stated that the subsidiary "is not presently the subject ofinsolvency proceedings."

Solar stocks have been getting hammered as crude oil prices havefallen. Evergreen is trading at around $3.80, a new 52-week low thismorning. There is no movement on JA Solar yet, but it closed yesterdayjust a dime above its 52-week low, before this news came out.

Paul Ausick
September 16, 2008