Monday, March 19, 2012

The Week in Solar: 'Too Big To Fail' Moment Arrives for China

Maxim Group analyst Aaron Chew was thinking about Trina Solar(TSL_) debt covenants this past week when digesting the China-based company's second straight quarterly loss. Trina's debt covenants stipulate that it must be profitable in a 12-month period or be in breach of its bank lending requirements.

With a combined loss per share of $1.38 over the past two quarters, Trina would have to earn at least $1.39 in the first half of 2012 to not breach this debt covenant. This isn't just a heroic earnings target, Chew realized, but is in fact an impossible dream. The first half of 2012 isn't expected to be more than break even to marginally profitable for any Chinese solar company.

Then Chew came to the real issue at the heart of the Trina debt covenant: There is no real bankruptcy risk when it comes to Chinese solar because the Chinese government and Chinese banks have too much invested in the sector. If the Chinese banks can't carry these solar companies on their backs forever, just how they lessen the load a little has always been the opaque road to which the Chinese solar manufacturing onslaught has been leading.

LDK Solar(LDK_), the poster-child for Chinese solar balance sheet imbalance, has a chairman who has pledged his shares to the banks as collateral, and as the situation in the solar sector deteriorated in 2011 and LDK shares plummeted in value, analysts began worrying about the Chinese banks forcing a margin call.

The big question for a while has been what will the Chinese banks, and the Chinese government do when push comes to shove?

The sector may be on the cusp of an answer because Germany's decision this week to act sooner and swifter in reducing solar subsidies than anticipated has all the makings of a too big too fail moment.

The immediate aftermath of the German move -- which will limit what was solar's biggest market in 2011 at 7.5 gigawatt to 2.5 GW-3.5GW in 2012 -- is that China will finally be forced to pick up the slack and become a 7 gigawatt or more market this year.


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