Suntech Power's logical move with the $500 million convertible

Suntech Power picked probably one of the worst timing for issuing its $500 million convertible, just as its stocks is hitting 52 weeks low, and the capital market is experiencing the worst liquidity crisis in recent years.

The question is why the hurry? They said the proceeds will be mainly for prepayment to a silicon supplier, $300 million of the total. Typical industry term is 10%, so $300 million translates to something like a $3B 10-year contract, 300MW/year for 10 years.

Looking at the balance sheets of some their competitors, this is the logical move. JASO for example has $250mil prepayment on their books for a 340MW 2008 production target. STP currently only has $200mil, plus the around $100mil warrant to MEMC to support their 530MW 08 target and beyond. You can see how STP is "under prepaid" by comparison, and how the likes of JASO have forced STP into this move by their aggressive silicon procurement strategy.

The flip side of the coin is if the JASOs want to keep doing what they are doing now, they themselves will have to come back to the capital market pretty soon as well.

Looks the game plan for STP is, eventually, some of the smaller players, like CSUN, will be raced out of this capital intensive game.