Company suing to regain 30.9m shares it lost in bond deal

By Beth Healy

Globe Staff / October 22, 2008

Evergreen Solar Inc. got a shock when Lehman Brothers Holdings Inc. went bankrupt last month: The solar panel maker lost control of almost 31 million shares of its stock.

How that happened is the subject of a lawsuit the Marlborough company filed yesterday against Lehman and the defunct investment bank's new owner, Barclays Capital. It also sheds light on the kinds of complex deals that had become common on Wall Street before the market meltdown.

Evergreen, when it needed to raise money in July to build a plant at the old Fort Devens site, arranged a $375 million bond deal with Lehman. But there was a catch. As part of the transaction, Evergreen had to lend Lehman 30.9 million shares of its own stock - so that hedge funds could borrow them and short them, or bet the stock would fall. That's right: Evergreen had to provide its own shares for hedge funds to short.

The arrangement is not unusual, analysts said, for a company like Evergreen. It's not yet profitable, its stock has fallen 79 percent this year, and options for raising money were limited. The company's chief financial officer, Michael El-Hillow, said convertible bonds - a type of bond that can convert to stock at a preset price - largely attract hedge funds. But when those investors buy the bonds, it's for insurance against the stock price rising; in other words, if the stock rises, they'd lose money on their short bet, but they'd make money on the bonds.

"The convertibles are always a tough way to do business," El-Hillow said. Evergreen had $44 million in state backing, a new factory on tap, a hefty backlog of orders, and plans to grow from 850 employees to 1,100, he said. "We needed the money."

There was supposed to be protection for the company in the contract with Lehman. If the investment bank's debt rating took a hit, or if the firm was headed for bankruptcy, Evergreen was supposed to get back its 30.9 million shares, according to the company's lawsuit, filed in US Bankruptcy Court for the Southern District of New York. With those shares locked up, Evergreen will have a harder time raising capital.

But Lehman's undoing happened quickly, over a weekend, and the firm filed for bankruptcy protection on Sept. 15. And it did not return Evergreen's shares, despite "repeated demands," and instead transferred 12 million of them to Barclays, which acquired Lehman's investment banking assets in the bankruptcy.

Evergreen said it didn't learn that the stock had been transferred to Barclays until the London firm filed a list of its stock holdings with the Securities and Exchange Commission on Oct. 8. Lehman had apparently sold about 19 mil lion shares of Evergreen stock, and handed 12.2 million to Barclays, according to the lawsuit.

"There is no legal basis under which the Barclays defendants can assert and establish ownership of the Evergreen shares," according to the lawsuit. Evergreen is looking to recover all of its 30.9 million shares and seeks unspecified damages to cover costs and attorney fees.

Neither Lehman nor Barclays had filed a court response yesterday. A Barclays spokesman declined to comment. A Lehman spokesman was not available for comment.

Stuart Bush, an analyst at RBC Capital Markets, said Evergreen is in a difficult position now, and essentially standing in line with all of Lehman's other creditors.

"They're in a real situation," Bush said. "What the company did - it's the worst of all worlds."

The immediate impact is that investors, who have already seen Evergreen's stock plummet this year, now also have to face dilution. That is, the 30.9 million shares, which were considered loaned out before, now count as part of the total shares outstanding - raising that figure 20 percent, to 162 million. That means the shares are less valuable. They fell 35 cents to $3.23 yesterday.

El-Hillow said the company has enough money to finish the Devens plant. But Evergreen wants to raise more money in 2009 - when it predicts it will be profitable.

"This has impacted anything we want to do," El-Hillow said.