Another Chinese company completed a secondary offering this week, diluting shareholders as LDK Solar (NYSE: LDK) tapped the market. Was this a well-timed move or a shot shareholders didn't need to take?
A well-timed sale
A $385 million convertible bill will be coming due in April, so LDK needs cash for more than just its audacious expansion plans. The $148.8 million sale, before over-allotment, gives the company plenty of cash to cover the conversion and ongoing expansion plans.
LDK has been setting this stock sale up for months by raising estimates for earnings and shipments, helping push its stock price higher. The offering was timed extremely well and will lower debt, something shareholders should be cheering, considering LDK's high leverage.
A shot to shareholders
If results were going to be so strong, why did LDK need the money now? It ended last quarter with $572 million in cash, and assuming another strong quarter as the updated guidance suggests, I wonder why the company needed equity financing now.
There's also the $9 billion of credit facilities LDK has available in a financing agreement with China Development Bank. That should have covered any expansion plans, leaving continuing operations and cash on hand to cover any upcoming financing needs.
Topping it all off was the explanation for the offering: funds would be used for "general corporate purposes." This could very well mean eventually it will be used to pay down debt, but why wouldn't you just say that?
The Foolish bottom line
This may have been a shot shareholders needed to take. LDK has far more leverage than competitors Trina Solar (NYSE: TSL) and Hanwha SolarOne (Nasdaq: SOLF). The stronger balance sheet may keep these stocks from flying high on good news in the solar sector, but they also won't come crashing down if times get tough.
Even though there was plenty of cash to draw on from its outstanding credit facilities in China if LDK needed it, the offering was probably good in the long run. The stock didn't suffer huge losses because of the offering, so ability to lower debt should be looked at as a positive for this highly leveraged company.
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