Cash-strapped Chinese solar panel maker Suntech Power is likely to be bailed out by the state, despite a temporary reprieve from some debt holders, as it struggles to cover a $541 million convertible bond due within days.
Despite billions of dollars in subsidies, Suntech and other indebted solar industry manufacturers like LDK Solar have been hemorrhaging cash, hit by trade disputes and a global panel glut that has caused prices to collapse and hammered their once high-flying stock prices over the past two years.
Suntech, one of the world's largest solar panel manufacturers by capacity, said on Monday it had reached an agreement with investors holding more than 60 percent of the bond due this Friday to defer their debt payment by two months.
That may have won it some breathing space to hammer out a debt restructuring plan, but it has yet to persuade the remaining 40 percent of bondholders to sign up. It does not have enough cash to even meet their $200 million portion of the debt.
The decline of Suntech, a former green tech poster child with a New York Stock Exchange listing and a market value of $16 billion at its peak, presents China with a dilemma.
While some industry officials have argued it makes sense to let some solar panel makers go bankrupt in light of the worsening oversupply of panels, analysts say that allowing Suntech to fail could trigger a crisis of confidence in a sector whose development Beijing has made a priority.
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"Two months from now, bond holders will likely have to compromise and take some sort of haircut, and then Suntech will get help from local government," said CLSA analyst Charles Yonts, echoing the view of other analysts.
The problem for Suntech is that, with no sign of a recovery from the industry-wide slump, it will not be able to repay the debt in two months time even if all of its bond holders agree to defer the payment now.
The government of the city of Wuxi, the solar technology hub where Suntech is based, is in talks with the company and may prefer a bailout rather than risk wider repercussions for the sector and local banks from allowing it to fail, people with knowledge of the matter told Reuters.
"Wuxi government may rush to its rescue," one source said by phone from the city, in eastern China.
However, the sources said the municipal government would refrain from an aggressive bailout, given the solar sector's dismal prospects, and bond holders would still need to "take a haircut" -- undertaking part of the losses.
Calls to the offices of the Wuxi government went unanswered.
China's solar panel manufacturing industry employs hundreds of thousands of people and is the largest in the world by capacity, after local governments jostled to attract investment in the sector with preferential policies in recent years.
State banks had provided billions dollars of easy loans to the sector amid Beijing's push to develop clean energy.
Too Big to Fail?
At the end of March 2012, Suntech had total debt of $2.2 billion -- including loans from China Development Bank, and a $50 million convertible loan from the International Finance Corporation, the private sector arm of the World Bank.
It had a net debt-to-equity ratio of around 200 percent, and the ratio must have increased sharply over the past year as the solar industry deteriorated further, analysts say. The company has not released quarterly results since the second quarter of 2012, but reported losses for the four quarters before that.
Suntech in October hired investment bank UBS to evaluate alternatives for the convertible notes. UBS was not immediately available for comment.
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Suntech and UBS have been holding discussions with bond holders on restructuring, but they have kept their cards close to their chest.
"Basically they all are focused on that and it is a very sensitive issue for them," a Suntech spokesman said. He declined further comment.
Under a likely scenario, Suntech would turn part of the bonds into long-term debt guaranteed by a government entity, and convert the remaining debt into Suntech shares, analysts said.
"We believe Suntech is too large a company to fail and eventually will reach a financing deal with the local government," said Pranab Sarmah of Daiwa Capital Markets.
"My guess is there is a high probability of renegotiating terms with bondholders with some minimal payment. Cash for such payment will come from government entities against equity stakes in Suntech."
Bond holders would take a big hit from any bond-to-equity conversion. Shares of Suntech have plummeted nearly 99 percent from their 2008 peak of $90. Based on its Monday closing price of $1.15, the company has a market value of only $208 million.
Creditors Beware Ideas of March
Offshore creditors can push for bankruptcy proceedings against the Cayman Islands-incorporated company, but they would probably end up recovering little from the process given most of Suntech's assets are in mainland China and onshore lenders rank ahead of them in claims, analysts say.
There have been several instances of state support for the solar sector. In December, Bank of Beijing provided Hanwha SolarOne with a credit line of about $475 million, allowing it to repay its long-term debt after it reported losses for the last six quarters.
Optimism for a bailout was reflected in the bonds of Suntech and some of its peers such as Trina Solar and JA Solar . Suntech's convertible bonds, due on March 15, have recovered to $34.5/$36.50 from their December level of $28.50, versus an issue price of $100.
This means that while the bondholders don't expect to receive their principal outstanding in full, they expect to recover more than they did three months ago.
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Still, the bonds took a big hit in the past few sessions, down $8 ahead of the redemption deadline.
Shi Zhenrong, founder and a major shareholder of Suntech, will do his best to avoid a significant dilution of his family's controlling stakes in the firm.
There have been rumours that the Wuxi government has asked Shi -- who also owns substantial businesses other than Suntech -- to contribute to the restructuring and shore up Suntech. Shi, reached by Reuters by phone, declined to comment.
Last week Suntech issued a statement naming Susan Wang, a former chief financial officer of Solectron Corp, as chairman of the board. It said Shi would remain a director of the company.
Shi has said his removal was "invalid" and "misconceived and unlawful".
It was not clear whether Shi would take action to fight his removal, but his call has added to uncertainties surrounding the future of Suntech, analysts say.