LDK Solar (NYSE:LDK), one of China’s largest solar wafer manufacturers, has missed a payment on a $23.8 million bond due on April 15, raising questions about the firm’s future prospects and its very survival. The company reached a settlement with some of the bondholders to delay around $16.6 million in payments; however, the failure to pay the remaining bondholders is likely to constitute a default. We are not particularly surprised that LDK missed its debt payment since it has had the worst balance sheet by far among the large solar firms. However, the fact that it was unable to make a $7 million debt payment, which is just a fraction of some of its larger debts that are due in the coming quarters is definitely a sign that things could get uglier going forward. (Related read: Here’s Why We Think LDK Solar Could Be In Trouble)
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This Default May Not Have Severe Consequences, But Its Just The Beginning
Initially, the firm could be served with a notice of default for this debt and if it is unable to reach a settlement with the remaining bondholders (who are owed around $7 million) to extend the payment date, there remains a possibility that debt holders could choose to push the company into bankruptcy. However, we think the odds of this happening at this juncture are rather low since the amount owed is small and the firm should be able to work out a solution through negotiations.
Even if the firm is able to settle with these bondholders, several challenges lie ahead since it has over $3 billion in total debt with more than $2 billion due in around one year. The firm could potentially face a payment of a $240 million convertible loan unless it spins off its polysilicon manufacturing segment by June 3 (the odds of it doing so seem slim since the polysilicon business is in bad shape and valuations are likely to be dismal). The firm also has around RMB 2.2 billion ($350 million) in bonds due next year.  The yield of the firm’s 10% bonds due in February 2014, have increased from around 67% at the end of December to around 118.8 percent, signalling rising pessimism about the companies prospects. 
Long Term Options To Pay Debt Look Very Limited
Given the massive debt coming due, the question remains as to how the firm is going to raise the funds since its operational performance has been deteriorating rapidly. LDK has posted six quarterly losses and has seen its shipments and revenues plummet over the past year. In Q3 2012 gross margins (excluding one-time items) were just around 1% and, and we don’t expect results to get any better when it releases its Q4 2012 numbers April 18. (Related read: Here’s Why We Expect LDK Solar To Report A Lackluster Q4)
The firm has had some success in raising equity over the last two quarters, but the proceeds have been minuscule (under $50 million) in comparison with the debt and will barely be enough to fund its operations. Asset sales are also unlikely to help finance debt payments since most of the firm’s capital is tied up in expensive manufacturing equipment, which is likely to have little market value given the tough conditions in the broader solar industry.
Additionally, the Chinese central government, which has for long been a steadfast supporter of the solar industry, has been showing some reluctance of late in bailing out sick solar companies. This was evident when Suntech Power’s (NYSE:STP) primary subsidiary, Wuxi Suntech, defaulted on its bond payment and entered into bankruptcy last month. (Related read: What Are The Implications Of Suntech’s Failure To Make Its Bond Payment?) Since LDK is smaller and worse-off financially compared to Suntech, its unlikely that the government would want to support it in paying its debt.
Considering LDK Solar’s dismal financial position its seeming lack of options to pay off debt, we have a $0.89 price estimate for its stock which represents a 18% downside to the current market price. We will be watching the company’s progress in resolving this issue, and note that our price estimate could change materially based on the turn of events.Notes: