Yesterday, hedge fund manager John Hempton put up a post at Bronte Capital in which he questioned whether Trina Solar’s statements made in its SEC filings put it in breach of the covenants in its loan agreements, among other things. He also wrote a letter to the firm’s CFO and Investor Relations department asking for clarification, which he received. Unfortunately, the response fails to adequately address John’s very legitimate concerns, which I thought were so potentially interesting, I spent some time actually reading the particular credit agreement in question. What I found is at the very least extremely confusing…
Trina claims in its regulatory filing (annual report) AND in its response to Hempton that under the credit agreement, they are required to match funds utilized from the credit facility with funds from other sources (cash on hand, cash flow, proceeds from equity sales, etc), i.e. if they dra $50 from the credit facility they need to come up with $50 otherwise to work on the project the facility is intended to fund.
The problem is I couldn’t find any such language in the credit agreement. The comment I left on John’s site:
The closest thing I could find is “The total investment of the Project is USD597,900,000, of which the fixed assets investment is USD392,940,000, and the working capital is USD204,960,000. The sources of the Project funds are as follows: USD200,000,000 as capital funds of the Project; USD93,690,000 raised by the enterprise; USD304,210,000 coming from the syndicated loan,”
but that doesn’t seem to mean what the company has said in its response to you (eg 50% from the credit facility, 50% from other sources).
There does not appear to be anything resembling the language the firm uses in its 20-f nor in its response to you in the credit agreement. Curiously, if such was the case, I would expect to see “matching funds” (or something along those lines) in the “Definitions” section quite clearly explained, but I don’t see anything of the sort. Either way, I find it a bit hard to believe that if such clause(s) do somewhere exist, they consider uncertain future capital (equity funding/cash flow) as eligible matching contributions.
I also searched the document for words like “match,” “50%” etc and found nothing relating to matching contributions under the covenants in the facility and found nothing even remotely close to the statements made in the 20-f and the response to John. Is the company inventing covenants that don’t exist to rationalize their alleged capital expenditures, borrowings, and accounts?
There are many more orange and red flags in Trina’s filings that I will continue to share as I get around to it. This is a very complex company and there are just so many questions (and so few answers) this one post is just the very tip of the iceberg. Stay tuned.