Enphase Energy Uses Stock Strength to Raise Capital on the Cheap

Jon C. Ogg

Enphase Energy Inc. (NASDAQ: ENPH) has seen its shares surge over the past year. After exponential growth in its shares, now the company is using some of the great stock performance to raise capital. A look at the conversion terms and the current share price versus history shows that Enphase seems to be getting some rather inexpensive capital to bolster its balance sheet after posting a $161 million profit last year.

Enphase announced on Thursday that it priced $320 million worth of convertible notes. The 0.25% coupon matures on March 1, 2025, and its initial note conversion rate is 12.2637 shares of Enphase common stock per $1,000 principal amount of the notes. This generates an initial conversion price of approximately $81.54 per share, which was a 52.5% premium to the $53.47 per share closing price on March 4.

What has been amazing to see here about Enphase is that this was basically a $50 stock as recently as October of 2018. Its shares rose to as high as $59.15 earlier in 2020, and the prior closing price of $53.47 still implies a ten-bagger for investors who have ridden this for 18 months or so. The current market cap was also $6.5 billion, so even using a capital raise at this point on top of a $251 million cash balance at the end of 2019 does not seem egregious.

As for the use of funds, Enphase indicated that about $17.5 million of the net proceeds will be used to fund hedging transactions (see below) and the remaining net proceeds from this convertible note offering were flagged for general corporate purposes. Those purposes were said to include debt repayment, working capital, potential acquisitions and strategic transactions.

According to Enphase’s press release:

Prior to the close of business on the business day immediately preceding September 1, 2024, the Notes will be convertible at the option of the noteholders only under certain circumstances and during certain periods as set forth in the indenture for the Notes. Thereafter, until the close of business on the second scheduled trading day immediately preceding the maturity date, the Notes will be convertible at the option of the noteholders at any time regardless of these requirements. Initially, conversion of the Notes will be settled solely in cash; however, following satisfaction of certain share reservation conditions, conversion of the Notes will be settled in cash, shares of Enphase common stock or a combination of cash and shares of Enphase common stock, at Enphase’s election.

As is customary with convertible note offerings with conversion prices at or above the current market price, Enphase is also entering into convertible note hedge transactions with certain of the initial purchasers in an effort intended to reduce potential dilution to the common stock upon any conversion. The release also indicated that Enphase expects to enter into warrant transactions with the counterparties and the warrant strike price was initially set at $106.94 per share for a 100% premium over its prior closing price. The company also noted:

In addition, the hedge counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to Enphase common stock and/or purchasing or selling Enphase common stock or other securities in secondary market transactions following the pricing of the Notes and prior to the maturity of the Notes (and are likely to do so during any observation period related to a conversion of the Notes). This activity could also cause or avoid an increase or a decrease in the market price of Enphase common stock or the Notes and, to the extent the activity occurs during any observation period related to a conversion of the Notes, it could affect the number of shares and value of the consideration that noteholders will receive upon conversion of the Notes.

Enphase shares traded down about 2.7% at $52.00 early Thursday morning, in a 52-week range of $8.03 to $59.15. The consensus target price from Refinitiv was $49.67.