The bankruptcy of Wuxi Suntech, the primary operating unit of Suntech Power (NYSE:STP), is viewed as a sign of changing times in China’s solar sector. Although the unit will continue production as it works to restructure debt, the bankruptcy underscores that government support for the solar sector could be weaning and only the fittest firms will survive in the long term.
Here are key takeaways of the bankruptcy and its implications for the broader Chinese solar sector and some of the solar firms that we cover.
Raising Funding From International Investors Will Become Difficult
Suntech, like most other Chinese solar firms, expanded its operations through heavy borrowing (debt of over $2 billion). With the default on its convertible notes and the consequent cross defaults and bankruptcy, international investors in particular are likely to be apprehensive about making loans to Chinese solar firms, since Chinese banks often have priority claims over a firm’s assets compared to international lenders in the event of insolvency. Raising equity will also be difficult. The enormous debt levels and weak cash flows that most firms are experiencing put equity holders in a very fragile position. For instance, Suntech raised around $742 million in two stock offerings on the Wall Street in 2005 and 2009. The stock is now worth less than 1% of its peak value.
Raising funds from domestic investors is also likely to be difficult given China’s relatively underdeveloped domestic bond markets and firms will have to increase there dependence on China’s state run banks such as the China Development Bank and the Industrial & Commercial Bank of China Ltd. With Wuxi Suntech’s bankruptcy, it is possible that state-run banks will get more selective in their lending to solar companies as well.
Highlights That China’s Central Government Is Reluctant To Bail Firms Out
The government has played a central role in developing China’s solar industry by providing loans and credit lines for companies to build and expand their manufacturing capacities. Later, state governments began bailing firms out and providing for liquidity needs when the situation in the global solar market took a turn for the worse. These measures haven’t been very effective in improving the overall health of the industry since the primary issues plaguing the industry were overcapacity and rising trade barriers.
Now, the central government seems to have taken cognizance of this with China’s state council’s announcement in December that it would refrain from propping up weak solar companies and indicated that consolidation and bankruptcies would help the industry. The central government’s reluctance to step in and bail Suntech out is certainly a sign that the government is holding firm on its word. Regional governments on the other hand could bail companies out on the premise of protecting jobs and the local economy, however whether the central government will allow such a move remains to be seen.
Industry Consolidation Could Be Imminent
Suntech has a total manufacturing capacity of around 1.8 GW of which around 1.2 GW was part of the Wuxi Suntech unit which filed for bankruptcy. ((Bloomberg)) Since the firm is likely to continue its manufacturing operations as it restructures debt, it is unlikely to have an immediate impact on the industry capacity. However, the broader industry trends point towards consolidation within the solar industry. China alone estimated to have as much as 59 GW of manufacturing capacity while global demand in 2012 was a mere 30 GW.  This has lead to severe competition among manufacturers with panel prices falling by around 30% over the last year.
Most Chinese solar firms have had gross margins which were negative or in low-single digit during 2012 which is definitely not sustainable in the long run and firms continue to hemorrhage cash. Now, considering that international funding could tighten and government support could also wean, it looks increasingly likely that smaller and less healthy firms would be forced to shut shop or be acquired. Consolidation within the industry would bring about better pricing and profitability.
Implications And Outlook For Some Solar Firms That We Cover
LDK Solar (NYSE:LDK) has one of the most overstretched balance sheets among the solar stocks that we cover. At the end of Q3, the firm’s shareholder equity stood at a paltry $30 million while debt was over $3 billion. What is even more concerning is that about $2 billion is due in less than a year.  The firm also has a bond payment due next February.  LDK hired Citigroup to help it renegotiate some of its borrowings but the progress is still uncertain. While the firm has been taking steps to get back on track by selling assets and downsizing its workforce, its overwhelming debt load and negative cash flow leave it with a high risk of insolvency.
Trina Solar (NYSE:TSL), on the other hand, has comparatively better finances than some of the other solar firms that we track. As of Q4, its total debt stood at $1.3 billion while cash was around $920 million. While gross margins have been low, the firm has been cutting down on costs and improving operational efficiency and the management has emphasized that its near-term focus will be on pricing and not volumes, which indicates that margins could improve. The firm has a $137 million convertible bond payment that is due in July; however, we do not believe that this will be an issue given the firm’s reasonable liquidity position. Trina could be in a position to lead industry consolidation by acquiring weaker solar firms.Notes: