Sunstruck: Accounting for Corporate Stock Loan Agreement Costs - Energy Conversion Devices and SunPower Cases (Addendum to Evergreen Solar Study)

Abstract

An earlier report suggested that counterparty risk exposure be added to the litany of misgivings on the economic efficiency, absolute performance, and governance of accelerated stock repurchase agreements (ASRs). In that study, Evergreen Solar in July 2008 issues a convertible, enters into an offsetting, broker-backed long call-spread, and signs a stock loan/collateral agreement. Two months later, the underwriter (Lehman) files for bankruptcy. The Evergreen case did not include a conventional ASR, but its three components together shared many convertible-funded ASR features, a commonality that raised the question of whether, similarly, the counterparty risk of complex ASRs might be routinely underestimated.

The current study, a work in progress, briefly reviews two additional solar companies who, like Evergreen, engage in stock loan transactions. Evergreen exposed itself to 18.7% dilution through its stock loan agreement, a risk quickly realized. In the case of Energy Conversion Devices, the firm shoulders 7.5% potential dilution, and SunPower countenances 5.5% potential dilution (a portion of which has been realized). In all three instances, the companies receive zero benefit from the stock loan other than the promise of facilitating the issuance of a convertible.

The data collected here is a first step towards answering three questions:

* How prevalent is the practice of corporations entering into stock loan agreements in conjunction with convertible or other security offerings?

* Accounting treats stock loans as free (no EPS effect). Is that reasonable?

* What is the economic value to the counterparty (the brokerage), who receives stock in a stock loan agreement?

Contributions of additional histories of corporate stock loan transactions are invited.

Keywords: stock loan, accelerated stock repurchase, ASR, 10b-18, 10b5-1, stock buyback, convertible, ESLR, ENER, SPWRA, Evergreen Solar, Energy Conversion Devices, ECD, SunPower

JEL Classification: G10, G20, G24, G30, G32, M41