LDK Solar Props Up Balance Sheet With New Equity And Leaseback Agreements

by Trefis Team
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LDK Solar (NYSE:LDK), a troubled Chinese solar equipment manufacturer, is taking measures to shore up its financial position. Over the course of the last month the company announced that it would be selling a 20% equity stake to a state backed firm and also outlined plans to divest three manufacturing facilities in a leaseback arrangement.

Debt Laden Balance Sheet Prompted The Move

The company which was founded in 2005 grew rapidly by means of debt financing, expanding its manufacturing capacity across the solar value chain – from polysilicon to modules. The company is now the world’s second largest manufacturer of wafers and PV cells.  However, over the last two years tough industry conditions have worked against the firm’s large scale, low cost model resulting in weak sales, negative gross margins and a precarious balance sheet situation.

LDK Solar has the most leveraged balance sheet in the industry with total debt standing at around $3.5 billion, of which a whopping $2.4 billion is current. The company also faces a cash crunch with free cash coming in at just $296 million at the end of Q2. Due to the deep losses, the company’s shareholder equity has been eroding, standing at just $171 million.

 

Implications Of Stake And Asset Sales On LDK Solar

Heng Rui Xin Energy, a company partially owned by the state government, purchased $23 million worth of newly issued shares of LDK Solar, which translates to a holding about 20% of the company’s equity. The share price for the deal was $0.86, a small premium over the stock’s market price at the time the transaction was announced.

LDK Solar will sell three solar plants to Henan Xindaxin Materials Co. for 140 million yuan ($22.4 million). LDK will lease the plants back starting in November, for a sum of 9.9 million yuan ($1.6 million) per year. Sale and lease back arrangements are popular with cash strapped companies as it allows them to free up cash while continuing to use the assets. [1]

Although the total cash infusions from the equity and asset sales amount to just $45 million, which is quite meager in comparison with the company’s debt load and cash requirements, they reaffirm the commitment of the management and the Chinese government in getting the company back on track.

In early October LDK Solar’s controlling shareholder, LDK New Energy holdings, reached an agreement with lenders to refrain from selling the 53% stake of LDK solar that was pledged as collateral for another 12 months. [2]

We have a price estimate of $0.98 for LDK Solar, which is about 15% ahead of its current market price.

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Notes:
  1. LDK Sells Solar Plants to Henan Xindaxin for $22 Million, Bloomberg []
  2. LDK Solar: Largest Holder’s Lenders Won’t Pursue Sale Right For a Year, WSJ []
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