China Solar Energy Lifelines Defy Speculation of Forced Mergers

19 january 2013

NEW YORK CITY — China’s $20 billion solar industry is avoiding loan defaults and mergers by taking aid from local governments, preserving jobs at money-losing companies such as LDK Solar Co., the world’s second-biggest maker of solar cells.

LDK agreed last month to sell a 19.9 percent stake to a renewable-energy investor part-owned by the city of Xinyu, home to its headquarters. Suntech Power Holdings Co., the world’s largest solar-panel maker, got a $32 million loan in September organized partly by Wuxi, the city where it’s based. The aid helps as the companies prepare to report combined 2012 losses of $987 million, analyst forecasts compiled by Bloomberg show.

The moves counter efforts by the central government to engineer mergers that create a handful of larger solar companies, said Jeremy Haft, founder of BChinaB Inc., a New York-based consulting company that specializes in Chinese business practices. The country has previously pushed consolidation to strengthen industries such as steel and coal.

Provincial governments mostly want solar manufacturers “to keep the lights on and not lay people off,” Haft said. “There are a lot of people unemployed” in China and local government officials don’t want to see solar factories close up, he said.

Local aid efforts haven’t sparked a rally in LDK and Suntech. They’ve lost 37 percent and 12 percent, respectively, in the last three months, outpacing the 11 percent loss for the 17-member Bloomberg Global Large Solar Energyindex over the same period. LDK gained 1.1 percent to 91 U.S. cents at 10:19 a.m. in New York and Suntech rose 6 percent to 96 cents.

At the same time GCL-Poly Energy Holdings Ltd., the world’s biggest solar-wafer maker, has increased 15 percent in the last three months. The company has been mentioned in Chinese news reports as a possible merger partner.

Encouraging Consolidation

The China Securities Journal said national government-run China Development Bank Corp. is encouraging consolidation between panel makers, pledging financial support for 12 companies. The move may lead other strugglingsolar manufacturers to close their doors or agree to be bought, the journal said in a Sept. 25 report.

China Development Bank is motivated to keep struggling solar companies afloat, especially those that have borrowed from it, said Melanie Hart, policy analyst at the Center for American Progress in Washington. The lender is putting pressure on local governments to support companies so they will repay loans, she said.

The bank is telling local officials “we won’t lend anymore to anyone in your region until they pay us back,” she said.

Those local efforts contrast with China’s national goals, which are commonly described as “grasping the big, letting go of the small,” Hart said.

Biggest Obstacle

Help from local governments may be the biggest obstacle to making China’s solar industry competitive, said Shyam Mehta, solar analyst at the Boston-based consulting company GTM Research.

“Until they stop supporting the uncompetitive manufacturers, this won’t go away,” said Mehta. “If LDK was allowed to fail, the market reaction would actually be positive.”

Suntech is evaluating various financing options and cutting costs, and in September temporarily reduced production in Wuxi, Suntech spokesman Rory Macpherson said in e-mail. He didn’t say whether the company expects additional support from the community. Telephone calls to LDK spokesman Li Longji went unanswered.

The country’s state-owned electricity distributor China State Grid Corp. announced incentives Oct. 26 to encourage smaller solar projects, with capacity of less than 6 megawatts, such as rooftop systems. It will buy the electricity and exempt owners from certain fees, which may spur sales at the strongest panel suppliers.

Paying Debts

Neither LDK nor Suntech is profitable and both will have trouble paying their debts, according to Pavel Molchanov, an analyst at Raymond James & Associates Inc. in Houston. LDK is expected to lose $518 million this year and Suntech may post losses of $469 million, according to analyst estimates compiled by Bloomberg.

LDK and Suntech both have balance sheets “so egregious” they would be “imminent bankruptcy candidates if they were American or European,” Molchanov said in an interview. “But they’re not, so we kind of have to look at them differently.”

“Every province, every city, every bank is going to try to protect their vested interest as best they can,” he said. “That’s why kicking the can down the road has been the dynamic so far.”

Total Debt

Suntech’s total debt was about 2.8 times its total equity at the end of the first quarter, the most recent figures available. That’s more than doubled in a year, from 1.3 times a year earlier. LDK’s debt, almost 8 times its total equity at the end of the second quarter, has more than tripled from 2.2 times a year earlier.

Suntech has about $2.3 billion in debt, including $541 million in convertible notes that are due in less than five months.

The city of Wuxi set up a task force in September led by the mayor to help the company and is holding talks to ensure that lenders provide financial support, such as Bank of China Ltd., which provided a 200 million-yuan ($32 million) loan. The regional government pledged to “actively and firmly” support Suntech.

LDK has about $3.6 billion in total debt. The company agreed Oct. 22 to issue new shares that will be bought by Heng Rui Xin Energy Co., which is 40 percent owned by the Xinyu State-owned Asset Management Co., giving it a 19.9 percent stake.

Additional Support

That agreement was the second show of support for LDK from the city in three months. Xinyu agreed in July to pay a portion of the company’s debt owed to Huarong International Trust Co. LDK didn’t say how much will be covered of the $79.4 million it owed the lender as of the end of last year. LDK named five new directors Nov. 5, including a provincial official and a financial consultant with ties to the city.

Other Chinese communities are supporting local solar manufacturers. A company controlled by Dongying, a city in Shandong province, offered $10 million for a 50.38 percent stake in CNPV Solar Power SA’s sole asset, CNPV Dongying, on Nov. 1.