The Case Of The Missing Solar Shares | Did Evergreen fly too close to the sun in Lehman deal?
Photo/Livia Gershon
Evergreen Solar CEO Richard Feldt at the ribbon cutting ceremony for the company's $425 million solar panel manufacturing plant in Devens.
In June, as the economy was beginning to sour, top executives from Evergreen Solar were arranging a complex and risky derivatives contract with top executives at highly-respected, century-old investment bank Lehman Brothers Holdings Inc.
By the time October was barely a week old, Lehman was bankrupt and being acquired by Barclays PLC. Like the doomed investment bank, 31 million shares of stock Evergreen had lent Lehman as part of the arrangement were gone, leaving Evergreen in the unenviable position of having essentially given away 31 million shares of company stock.
And Michael El-Hillow, Evergreen's CFO, doesn’t seem particularly confident about getting those shares back.
Legal Limbo
In addition to suing Lehman and Barclays for the return of the shares, the company is now lobbying the federal government for a $150 million slice of the $700 billion bailout pie El-Hillow says would be used to buy back the shares it lent to Lehman. It is also hoping President-Elect Barack Obama will enact a unified national energy policy when he gets into office that will incentivize the use of alternative energy and stabilize Evergreen Solar’s position in the stock market.
But while no one could’ve predicted that Lehman Bros. would simply go out of business, Evergreen’s agreement with the bank was predicated on the company’s own aggressive interpretation of U.S. Generally Accepted Accounting Principles (GAAP) rules and perhaps an over-willingness to trust that one of the biggest, oldest and most well-known financial institutions on Wall Street had 13-year-old Evergreen’s best interest at heart.
El-Hillow describes the situation this way: “It’s as if Lehman decided to sell its house and on the wall was a picture that said it was there on loan from Evergreen Solar and Barclays just took it off the wall.”
Something For Nothing
While Evergreen’s situation is dumb-founding, El-Hillow insists the deal-gone-bad isn’t a death knell for the growing manufacturer.
“The company is not at risk,” El-Hillow said. “But we have, in effect, sold 31 million shares for zero, and $300 million to a company our size is very powerful.”
El-Hillow said the company has enough cash to finish the massive, $425 million Devens manufacturing plant the Lehman arrangement was intended to finance, and the first phase of a plant it’s building in Michigan. It’s enough cash to get the company into mid-2009, “when we start generating cash from operations,” El-Hillow said.
But El-Hillow said that the current position of the company certainly was not Plan A, and it puts Evergreen’s plans for expansion and its ability to raise funds in the future in serious doubt.
The good news for Evergreen is that everything the Devens plant will make in the next five years has already been sold.
But, the question, according to Jonathan Hoopes, a stock analyst who follows Evergreen Solar for ThinkEquity LLC in New York, is how quickly Evergreen will be able to expand their capacity.
“Their expansion in Asia is going to take more capital and they’re going to have to find a way to (either) raise that capital or slow their expansion.”
In its complaint against Lehman and Barclays filed in U.S. Bankruptcy Court for the Southern District of New York late last month, Evergreen doesn’t sound like a company in a great position to raise capital. It says it will be “irreparably harmed” if the court does not issue an injunction to stop Barclays from transferring Evergreen shares.Last week, U.S. Bankruptcy Court Judge James Peck disagreed, and denied Evergreen’s injunction request.
Under Evergreen’s interpretation of GAAP rules, the 31 million shares it lent Lehman did not have to be counted as outstanding when the company calculated earnings per share for investors, because as the company saw it, it “had the absolute right to the return of the loaned shares.” That meant that the per share earnings it reported were greater than they would’ve been if the company had taken into account the 31 million lent shares.
Wings Of Wax And Feathers
But Lehman wasn’t just holding onto the Evergreen shares.
They were part of a commonly used, but juiced up transaction intended to give Evergreen the most bang for its buck. Companies issue convertible bonds all the time. It’s a tried and true way to raise money for capital projects or operational expenses.
But selling debt to investors who intend to hold those bonds for the long haul is not very sexy, and if that’s all Evergreen had done, El-Hillow estimated that it would’ve been able to raise only about $50 million. And Evergreen “wanted to raise the funds. We wanted to build a facility,” he said.
So, Evergreen loaned 31 million shares to Lehman Brothers International Europe, a subsidiary of Lehman Brothers Holdings Inc., to offer for short sale to hedge funds that would buy the bonds. That arangement would have meant more bang for Evergreen’s bond, as it were. It also meant that Evergreen, by lending its shares to Lehman, had assumed all the risk of a Lehman default.
“We put as much protection as we possibly could…” El-Hillow said. “If there was a Lehman bankruptcy, those shares had to be returned to us immediately. We were calling them. I was talking to them constantly about their situation. When they declared bankruptcy, we demanded our shares back.”
About 12 million of those shares, about 7 percent of Evergreen’s outstanding publicly traded shares, were transferred by Lehman to Barclays during the British firm’s takeover of Lehman Bros. The other 19 million are, as one analyst put it, “out there floating in the market.”
Now, “it’s between our lawyers and their lawyers,” El-Hillow said. El-Hillow’s emails to Barclays’ entire board of directors, including its ethics committee, were sent “to no avail,” he said. Barclays has not responded at all.
In opposition to Evergreen’s complaint, James W. Giddens, the trustee for the Lehman Brothers liquidation, said that while Evergreen repeatedly refers to a requirement that its shares be “revested” to Evergreen or “divested” by Lehman in the event of bankruptcy the “contract says no such thing, but merely creates a contractual duty to deliver the shares under specific conditions.”
Even if the contract did include a requirement that the shares be “revested” or “divested,” that requirement would be void under U.S. bankruptcy law that absolves Barclays (which claims that it bought the shares from Lehman) of any responsibility for Lehman’s debts, Giddens argues.
El-Hillow admits that Evergreen could have, and in hindsight perhaps should have, found some other arrangement to fund its expansion.
“We could’ve issued straight equity, but that could not have raised $375 million. We could’ve done a hybrid, half stock and half convertible notes. In hindsight, we could’ve done some things differently, but we went to the highest levels of Lehman, a 150-year-old investment bank that had a good reputation. We probably should’ve spread out the transaction over a number of banks, but that would’ve been more expensive. We could’ve gone to a commercial/investment bank, but Lehman at the time was the best transaction we could’ve made for our shareholders.”
When Evergreen entered into the share lending agreement with Lehman in June, the company’s stock was trading near $10 per share. Today, in part because of the market’s general woes and in part because millions of the shares that were tied up in the Lehman agreement are now on the market, the company’s stock struggles to top $5 per share.
Market Forces
El-Hillow said he was confident that the company’s technology and the enormous potential in the alternative energy market, especially in the United States, would keep Evergreen on its feet.
For El-Hillow, Evergreen’s potential should be enough to convince the federal government to loan the company $150 million out of its $700 billion financial market bailout package.
Then, Evergreen could somehow buy back its shares from Barclays and perhaps those that are floating around in the market with the promise that the realization of the company’s enormous market potential would allow it to pay back the government more than it had borrowed.
“We don’t want a freebee. We want to open another factory,” El-Hillow said.
Evergreen has asked U.S. Rep. Jim McGovern, D-3rd District, and U.S. Rep. Barney Frank, D-4th District, for help.
But it’s not promising, according to a McGovern spokesman.
“We looked into it, and there’s really nothing available in the bailout for them. The rescue package, or direct from the Department of Energy, there really isn’t anything for them.”
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