Sunday, October 28, 2012

Debt-Laden Chinese Solar Firms Need Infusion of Funds

As solar panel prices continue to tumble, Chinese solar companies are struggling with heavy debt loads, fueling expectations that many will be forced to seek new infusions of funds through takeovers or mergers.

Suntech Power Holdings could be liable for hundreds of millions in new payments after it disclosed a potential fraud by a partner, while peers like LDK Solar, JA Solar Holdings, Trina Solar and Yingli Green Energy Holding are also feeling pressure.

With prices for solar panels barely covering the cost to build them, dozens of small Chinese solar companies are believed to have shut their doors, and equity investors have fled the sector, sending share prices of the U.S.-listed Chinese companies down more than 85 percent since early 2011.

Most of the Chinese solar companies will be able to stay open only if government lenders continue to keep lines of credit open despite forecasts of several more quarters of red ink.

“Solar as an industry is going to continue to grow,” said Brian Salerno, portfolio manager for Huntington EcoLogical Strategy ETF. “However, my belief is that for most of that time it’s going to be profitless prosperity.”

Solar analysts have pointed to LDK Solar as also having one of the country’s most stretched balance sheets, with debt and other liabilities of $6 billion versus cash and equivalents of just $244 million.

JA Solar listed its debt and other liabilities at $1.5 billion versus cash on hand of $676 million at the end of the first quarter. Trina Solar’s debt was a more modest $1.08 billion versus cash on hand of $490 million, while Yingli reported debt of $3.44 billion versus cash of $675 million at the end of the first quarter.

Suntech, which has the largest panel-manufacturing capacity, may be on the hook for $690 million in collateral related to the possible fraud, and it also has a $541 million convertible bond payment in early 2013.

The company, which had said it was in violation of some loan covenants, listed total debt and other liabilities of $3.58 billion, versus abut $474 million in cash on hand as of March 31, according to a filing with the U.S. Securities and Exchange Commission.

Beijing has provided billions of dollars in credit lines and other supports to its solar sector through state-run banks, prompting the U.S. government to impose import duties this year after U.S. manufacturers filed a trade complaint.

Though analysts and solar competitors outside China have long viewed government bank credit lines as a major funding advantage for Chinese solar makers, that support has encouraged the industry there to overspend on new factories, leading to a glut of panels on the market.

Obtaining a clear picture of the Chinese companies’ debts can be difficult, analysts said, because debts they often listed as short-term liabilities are perpetually rolled forward, essentially making them long-term facilities.

“Trina is probably the best positioned. The cost structure is great, and they don’t have as much debt as other vendors,” said Ben Schuman, an analyst at Pacific Crest Securities.

Nearly every solar company has been losing cash because of low panel prices, and policy makers in Beijing said last year that they wanted to see a healthier industry develop, with a smaller number of large, strong players.

Whether that consolidation will be spurred by Beijing or the debt-holding banks remains unclear.

“That’s the million-dollar question,” Mr. Schuman said. “I don’t know if it’s really even a question of if or when; it’s more a question of how. Is this going to be forced consolidation, or a bailout of the debt by state-owned enterprises?”

Analysts said that at least for now, Beijing was not likely to let its leading solar players collapse.

“As long as the government has deep pockets — and they do — you might just have the walking dead,” said Mr. Salerno of Huntington.

Local governments in China have also supported the companies in an industry that China sees as crucial to supplying electricity to its economy, but analysts said that support appears to focused on keeping the local job markets strong.

LDK Solar, which cut 5,000 jobs this year, was helped in July, when the government of Xinyu, in Jiangxi Province, announced that it would use taxpayer funds to repay the company’s loans.

Still, Yingli’s chief financial officer, Li Zongwei, said the Chinese state-run banks and foreign debt providers appeared willing to support the companies with the best prospects, and wait for a shakeout to trim the weaker players.

The banks “all believe that solar is an emerging industry that has a bright future, and a much better future after the consolidation,” he said. “They don’t want to give up their debt presence in the solar sector.”

Mr. Li said the company would generate cash flow in the second half of 2012, but predicted new players would enter China’s solar sector to take over or buy into weaker companies.

“To a large extent, I think the capital will be coming from the state-owned companies, or large domestic groups,” Mr. Li said.

For its part, Yingli, which tapped China’s debt market for about $236 million in May, is not interested in linking up with other companies, he said, but may seek to acquire equipment at low cost to expand operations.


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