Suntech Power (NYSE:STP) has reached an agreement with some of its creditors to defer payment due by the end of this week on a portion of the $541 million in convertible notes, until May 15. While this gives the firm an additional two months to negotiate with lenders and restructure its debt, we are concerned about the firm’s plans relating to the portion of the notes for which it hasn’t signed agreements. We also remain skeptical that the firm’s options in resolving the issue on a permanent basis could give existing shareholders a raw deal unless the Chinese government steps in to help.
Payments On 60% of Notes Deferred To May
Suntech said that it had entered into forbearance agreements with over 60% of the holders of its convertible notes; however, it made no mention about the remaining 40% of debt holders, who have not signed the agreement. The firm also downplayed this aspect in its brief press release.  According to Bloomberg News, some of the lenders who hadn’t signed the agreement said that they were unaware of the forbearance deal until it was announced.  Suntech’s plans relating to the remaining 40% of the debt remains critical since it amounts to over $200 million, which is a significant sum considering its dismal financial position.
Options Are Limited And Government’s Stance Seems Unclear
At this point, we think Suntech’s options to resolve the issue seem quite limited. The value of the maturing debt is more than double the firm’s current market cap and any decision to convert the debt into equity would dilute most of the existing shareholders’ stake in the company. The firm has also said that selling assets wouldn’t be an option and it does not have sufficient liquidity to make payments either. Last year, Suntech hired UBS AG to advice on restructuring its debt, but there has been a lot of uncertainty as to the progress it has made. (See Also: What Are Suntech’s Options As Debt Payment Looms)
It is difficult to say whether the Chinese government will support Suntech or let it fend for itself as its cues on supporting domestic solar firms have been quite mixed over the past few months. Last December, the Chinese state council took a tough stance on supporting money-losing solar companies, saying it would cut funding to them and would prevent state governments from supporting them as well. However, later in January, beleaguered solar giant LDK Solar (NYSE:LDK) received funding from the China Development Bank to upgrade some of its manufacturing facilities, indicting that the government was still supporting large firms. It is worthwhile to note that no Chinese solar firm has received funding until now to payoff foreign debt, and whether or not Suntech receives government backing is likely to be a test for the entire Chinese solar industry.
We have a price estimate of $0.91 for Suntech, which is about 20% below the current market price. We note that our price estimate could change materially, depending on the outcome of the payment issue.Notes: