Last week belonged to the financial disaster. Everyone focused on the same financial companies falling apart. Merrill Lynch had to perform a last ditch fire sale just like Bear Stearns had to a few months before. AIG was essentially nationalized, just as Fannie Mae and Freddie Mac had been a few weeks before. And Lehman Brothers, the oldest of the old investment banks, filed for bankruptcy protection. Rumors continue to swirl about Goldman Sachs and Morgan Stanley merging with banks. The day of the independent investment bank looks to be over.
Of all the bailouts and disasters, Lehman Brothers is unique because it was allowed to just fail. Pieces of the company have already been sold to a British financial firm and more assets are sure to be sold soon. The loss of Lehman will affect many other American firms and one of them is Evergreen Solar.
Back in July Evergreen Solar (ESLR) wanted to raise some more funds. They turned to Lehman and decided to sell some senior convertible notes. Lehman Brothers was the lead underwriter for $373.75 million of the notes. Part of the deal included Evergreen lending 30.9 million new shares of their stock to Lehman. Lehman would hold those shares for ESLR and return them to the company way out in July of 2013.
The benefit to Evergreen was that when the senior convertible notes were converted into shares, the dilution to existing shareholders would not be as detrimental.
For this whole fundraising endeavor Evergreen Solar had to pay Lehman $39.5 million. The good news is that ESLR walked away with almost $326 million after the deal was closed.
The residual problem for ESLR is that 30.9 million new shares. Originally, the deal was for Lehman to hold onto them in what is termed a capped call transaction. Lehman Brothers would be holding the new shares and then return them to Evergreen five years from now. But since Lehman is now being dissolved through the court the status of those new shares is in question.
ESLR is not planning on counting those shares as issued and outstanding. What makes this somewhat odd is that in the legal parameters of the original deal with Lehman, the new shares were to be considered outstanding shares of the company. Evergreen is saying that until more information is gathered concerning the dissolution of Lehman, and where the 30.9 million ESLR shares stand, the company will not be counting those shares in their quarterly reporting. ESLR is facing a bit of an open question on how and if they will be returned their shares, now that Lehman Brothers is in bankruptcy protection with Lehman creditors looking for assets to acquire.
From a basic understanding of the agreement, it would seem that Lehman would have to return those shares to Evergreen Solar. The shares were issued and outstanding, but were being held by Lehman with a prearranged deal in place to return the shares. With Lehman essentially falling apart, the shares should rightfully be returned to ESLR. Evergreen did nothing to default on the deal or breach the contract. The fact that Lehman Brothers will no longer be a going concern is not the fault of Evergreen Solar. Hopefully the bankruptcy judge agrees and there are no arcane securities laws surrounding this transaction that preclude ESLR from reclaiming their shares.
