Bloomberg News

Solar Defaults Shock Holders as $8.4 Billion Due: China Credit

September 03, 2013

LDK Solar Co.’s delay in paying debt and Suntech Power Holdings Co.’s attempts to renegotiate obligations are prompting investors to gird for losses as $8.4 billion in renewable energy bonds come due by the end of 2014.

The 2014 securities of LDK slid to a record low of 25.6 yuan per 100 yuan face value last week after the manufacturer said a payment due Aug. 28 on the notes would be delayed. That compares with the 30 euros per 99.861 euro issue price on Bonn-based Solarworld AG. (SWV) Suntech, once the world’s biggest panel maker, said former chairwoman Susan Wang and two other directors quit amid negotiations with holders of its defaulted debt.

Premier Li Keqiang’s steps to cut the state’s role in the economy are forcing investors to reconsider bailout bets as $1.3 billion of bonds in businesses including electric car batteries, hydropower and biofuels matures by the end of the year and $7.1 billion in 2014, according to data compiled by Bloomberg. His predecessor Wen Jiabao turned China into the world’s biggest maker of solar panels through spending including $47.5 billion of credit lines that crippled the industry with overcapacity.

“The debt repayment problems at Chinese solar companies are shocking investors who can now only wait to see how the government will handle them,” said Wu Yun, a Shanghai-based analyst at Evergrowing Bank Co. “Credit defaults may be concentrated in the second half of 2014.”

Solar Debt

China’s 10 biggest photovoltaic companies had debt of more than 100 billion yuan ($16.3 billion), the Ministry of Industry and Information Technology said Aug. 15. Notes coming due next year include 600 million yuan of securities sold by GCL-Poly Energy Holdings Ltd., the world’s biggest maker of polysilicon, and 100 million yuan of bonds from ZK Energy Science & Technology Co., a wind-solar hybrid system maker.

LDK failed to fully repay $23.8 million of convertible bonds that matured April 15 and is restructuring another $240 million of securities that were due in June. The company ended the second quarter with $2.8 billion in debt and $85.1 million in cash, the least since 2009.

Messages left at LDK’s (LDK:US) U.S. office in Sunnyvale, California for Chief Financial Officer Jack Lai weren’t returned on Aug. 27 and Aug. 29. Peng Shaomin, LDK’s director of media at the company’s headquarters in the southeastern province of Jiangxi, declined to comment when contacted by phone yesterday.

“LDK’s missed payment will enable the process of weeding out the companies that have become uncompetitive in an industry that is mired with oversupply,” said Amit Jain, a Bangalore-based analyst at SJS Markets Ltd. “The industry will run its course and only the fittest will survive.”

Suntech Restructuring

Offshore bondholders have more risks since “even the domestic banks may not completely recover their money,” Jain said.

The Suntech directors who quit cited concern about negotiations with bondholders, cash flow and a lack of a clear business plan, the manufacturer said in an Aug. 28 statement. The resignations highlight divisions among management following the company’s default in March on $541 million of convertible notes.

In June, the manufacturer extended a forbearance agreement with “a majority” of the bondholders until Aug. 30. The maker of devices that convert light into power expects to enter a restructuring framework agreement “in the next week or so,” according to a statement with PR Newswire dated that day.

Rising Risks

“Regarding the negotiations with the bondholders, as per our press release, we have reached an agreement with them to proceed as detailed,” Ryan Scott Ulrich, a spokesman, wrote in response to e-mailed questions. The company “plans to equitize the debt,” Ulrich added. “The restructuring will include both convertible bonds and domestic debt.”

Slowing economic growth is adding to concerns that more companies in China will miss payments. While recent trade and manufacturing data have shown stabilization, gross domestic product will still probably expand 7.5 percent this year, the slowest in more than two decades, according to the median estimate of economists surveyed by Bloomberg.

China’s credit-default swap contracts insuring the nation’s debt against non-payment have increased 38 basis points this year to 104.3, according to data provider CMA.

The yield on the country’s benchmark 10-year sovereign note has leapt 46 basis points to 4.04 percent. The premium on top-rated corporate securities due in a decade increased 3 basis points last month to 162 basis points. The yuan was at 6.1205 per dollar as of 11:55 a.m. in Shanghai, China Foreign Exchange Trade System prices show.

Survival Chances

Authorities will likely try to focus support for the solar industry on bolstering demand rather than providing funds directly, according to Wang Xiaoting, a Beijing-based analyst at Bloomberg New Energy Finance.

Bankruptcies may help weed out companies that are unable to meet their obligations, Wang said. “More and more solar companies will go bankrupt starting this year without continuous cash flow.”

China’s solar industry may revive this half as consumption grows abroad and local demand takes off, the Ministry of Industry and Information Technology said Aug. 15. The China Photovoltaic Industry Alliance between companies and the state expects the nation to double total solar installations from last year’s level.

Some top panel makers in China including Yingli Green Energy Holding (YGE:US) Co., the nation’s largest, and JinkoSolar Holding Co. are returning to profitability following two years of losses, after Asian demand drove up margins in the second quarter. Panel prices have gained 2.6 percent this year, according to data compiled by Bloomberg. The yield on JinkoSolar’s convertible dollar-denominated bonds fell to 11.7 percent on Aug. 30, the lowest since 2011.

“Banks and material suppliers are choosing companies with larger chances of surviving,” BNEF’s Wang said. “We’ll see improvement in collecting overdue payments as panel prices rise.”

To contact Bloomberg News staff for this story: Feifei Shen in Beijing at fshen11@bloomberg.net

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net


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