Taiwanese solar cell manufacturer Neo Solar issues a US$120mn, 3yr convertible bond. Proves viability for green bonds in uncertain policy environments

By Beate Sonerud, Climate Bonds analyst

Neo Solar Power Corp, the largest solar cell maker in Taiwan, recently issued a convertible bond of US$120mn.

FinanceAsia reported that it is a 3-year bond, with no coupon or yield, but a 10% conversion premium (NT$39.05; stock price at issuance date NT$35.50). The conversion premium was somewhat low, as guidance indicated 10-15%. Proceeds of the bond will be used to buy solar sell raw materials such as silicon wafers.

Unusually, the bond was credit enhanced by ING, one of the bookrunners, who provided a standby letter of credit for the bond. This provides assurance for investors, as the A-rated bank then guarantees that the principal and specified amount of interest are paid in the event of Neo Solar defaulting on their payments.

Now, a low conversion premium and need for credit enhancement might not sound too promising. But it does prove that there is a role for corporate green bonds beyond the investment-grade bond issuances from large companies and that it is a financing instrument that can work also in the face of significant policy risks, as is the case for Neo Solar: over the last year, US import restrictions on Chinese solar cells have made Taiwanese solar makers more competitive as they have avoided the US import levies. However, on July 24th US import restrictions are expected to be extended to include Taiwanese solar as well, which will erode the policy boost Neo Solar has experienced lately.

We’re still waiting for the first labelled green convertible bond, but convertible bond issuances have been popular in the solar industry. The key characteristics of a convertible bond is that can be converted into equity at maturity, providing investors with both the lower risk of a bond investment and the potential larger upside equity investment. Convertible bonds are therefore most often issued by companies with lower credit rating, but high growth potential. Credit Suisse recently stated that the current market environment with low interest rates makes convertible bonds more attractive as they provide an alternative for return without high risks.  

What about the green credentials of the bond? Coming from a solar company it’s defined as pure-play in our climate bond universe (our 2014 report on the size of this universe is out tomorrow!). The green credentials of the bond are based on the company being a solar maker rather than external certification of the particular bond. It’s worth noting that while we consider it a climate bond, it does not count towards the tally of the labelled green bond market. This shows that the US$20bn issuance of labelled green bonds so far in 2014 is really only the tip of the iceberg.

The issuance also provided investors an opportunity to play on the currency differences between the bond issuance (US$) and the company shares (NT$).

The buyers were reported as a mix of European convertible bond investors and Asian hedge funds. Daiwa and ING were joint bookrunners.