Collateral Damage: Do ASRs Carry Counterparty Risk? - Evergreen Solar Case Study

Abstract

The case of Evergreen Solar (ESLR) suggests counterparty risk exposure be added to the litany of misgivings on the economic efficiency, absolute performance, and governance conflicts of ASRs. 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 files for bankruptcy placing Evergreen, with about 134 million shares outstanding prior to the transaction, at risk of having issued 31 million shares at a price of $0.00 (zero). Coincident with the bankruptcy filing, Evergreen rushes to assure funding by the broker/banker of a segregated collateral account. The wake up call that complex equity deals may carry substantial counterparty risk is, at best, unpleasant.

The Evergreen case does not include a conventional ASR, but its three components together share many convertible-funded ASR features. That commonality raises the question of whether, similarly, the counterparty risk of complex ASRs might be routinely underestimated. In light of current economic dislocations, companies contemplating execution of complex ASRs (or with ASRs in progress) ought to weigh whether counterparty risk is attached and, if so, the adequacy of compensation. What to look for? In the case of Evergreen, the noose with the agreement might have been a clue.

Keywords: ASR, accelerated stock repurchase, Evergreen Solar, ESLR, 10b5-1, 10b-18, buyback, stock loan, Lehman Brothers, collateral, counterparty risk

JEL Classification: G12, G13, G24, G30, G32, G33, G34, G35, M41, K22