Survival of Fittest in Green Energy Shows Workout: China Credit

A survival of the fittest struggle is emerging as China’s renewable energy industry faces a record $7.7 billion in bonds maturing this year.

Yields are declining on Xinjiang Goldwind Science & Technology Co. notes as the nation’s biggest turbine maker raised profit forecasts, while shares of Trina Solar Ltd. (TSL) have tripled in the past year as pollution curbs buoyed demand for solar panels. By contrast, LDK Solar Co. is heading for a second default on overseas debt this week, while Suntech Power Holdings Co. filed for bankruptcy protection in U.S. courts.

“The weaker companies are being weeded out,” said Charles Yonts, a Hong Kong-based analyst at CLSA Asia-Pacific Markets. “The government is going to pick the winners and could force them to take the assets of the others.”

The shakeout in solar- and wind-power companies is testing the resolve of Premier Li Keqiang, who needs to allow consolidation to slow a buildup of debt in the economy estimated by a state think tank to account for 215 percent of gross domestic product. While the first default on an onshore bond has yet to occur, there are signs that industries with overcapacity including steel and shipbuilding are cracking under the weight of rising borrowing costs.

Manufacturing, Yuan

Manufacturing in China contracted to the lowest level in seven months in February, according to a preliminary Purchasing Managers’ Index by HSBC Holdings Plc. and Markit Economics. The yuan fell 0.05 percent to 6.0950 per dollar as of 11:08 a.m. in Shanghai today, the weakest level since November, after last week posting the biggest five-day decline in two years, according to China Foreign Exchange Trade System prices.

Solar-cell prices have started to recover after falling 70 percent since 2010 as an industrywide expansion of capacity exceeded demand. All three leading wind developers increased electricity sales in 2013, while the average spot price of polysilicon, which is used in solar cells, climbed 21 percent in the past year to $19.96 per kilogram on Feb. 10, according to Bloomberg New Energy Finance. China’s renewable energy stocks returned an average 86 percent last year, compared with a 15 percent decline in 2012.

Only three to five “leading” solar companies will remain in China by 2017 and account for 80 percent of the market, Trina Chairman Jifan Gao said in an interview last month. There are now about a dozen companies with the capacity to produce more than 1 gigawatt of cells a year. Trina, which returned to profitability in the third quarter, last week said it has bought a majority stake in solar-cell producer Hongyuan PV Science and Technology.

Acquisition Push

Successful clean-energy companies are starting to hear “word from the Chinese government that, rather than building capacity on a standalone basis, they should acquire smaller companies,” said Angelo Zino, a New York-based analyst at S&P Capital IQ. “That’s how the government takes a foot off the gas” while seeking to preserve jobs, he added.

The nation’s environmental degradation has made developing clean energy more imperative, with worsening pollution forcing Beijing to warn the elderly and children to stay indoors as recently as Feb. 21. China has 16 of the world’s 20 most-polluted cities, according to World Bank estimates. Pollution is the leading cause of social unrest in the country, Chen Jiping, a former member of the Communist Party’s Committee of Political and Legislative Affairs, said in 2013.

China plans to add 56.6 gigawatts of clean-energy capacity this year, including 20 gigawatts of hydro, 18 of wind and at least 10 of solar power, according to National Energy Administration data studied by Bloomberg Industries Hong Kong-based senior utilities analyst Joseph Jacobelli.

Pollution Fight

While Premier Li’s efforts to transform the economy to a consumer-driven model and clean up the environment have dried up funding for steelmakers, coal companies and shipbuilders, the government is unlikely to put the squeeze on renewable energy companies, CLSA’s Yonts said.

“Given the backdrop of Beijing’s fight against pollution, it’s impossible to conceive that they would suddenly yank out the rug from beneath renewable-energy companies,” he said. “But keeping them on life support forever is another thing, and they’re not keen to do that.”

China’s renewable energy companies have to repay $7.7 billion of bonds this year, the most in Bloomberg data going back to 2000. Such firms issued $8.1 billion of debt in 2013 and a record $9.6 billion in 2012, data compiled by Bloomberg show.

LDK Solar

LDK Solar, once the world’s second-biggest maker of solar wafers, signed a new agreement with note-holders this month to extend a deal to delay payments initially scheduled for August 2013 by another 14 days to Feb. 27. It has to pay the principal the next day. The company’s 10 percent notes tumbled to 27 yuan on Feb. 21, compared with the 100 yuan issue price. LDK will make an announcement on the issue next week, media director Peng Shaomin said Feb. 21 when asked for comment.

Shanghai Chaori Solar Energy Science & Technology Co., which averted default on an interest payment last year and had just 618.7 million yuan cash as of September, will pay 898 million yuan of debt in March, according to Guotai Junan Securities Co. Chaori may default on its 8.98 percent bonds maturing in 2017, according to Xu Hanfei, a Shanghai-based analyst at Guotai Junan.

Sinovel Wind Group Co.’s five-year notes, whose yield has surged 419 basis points since 2012 to 10.9 percent today according to exchange data, may be suspended from trading if it reports a second year of losses, the company said last month.

Default Chances

The likelihood of Chaori defaulting is high as it has become harder for the loss-making company to obtain bank loans for interest payments, said Xu. The company’s debt-to-asset ratio was 90.1 percent at the end of the third quarter, according to a company financial report released Oct. 27.

“This year, banks’ risk management is stricter, so they may not lend money to Chaori again,” he said. “The company didn’t improve, and efficiency is still low.”

China needs to deleverage because total liabilities in the economy reached 111.6 trillion yuan in 2012 and accounted for 215 percent of gross domestic product, Li Yang, vice president of the Chinese Academy of Social Sciences government think tank, wrote in an article in Shanghai Securities News in December.

There are signs that the government is allowing corporate borrowing costs to rise as it seeks to slow expansion of capacity. Money-market costs have surged, with the benchmark three-month Shanghai Interbank Borrowing rate jumping to 5.59 percent on Feb. 21 from 3.89 percent in June 2013. The yield on China’s 10-year government bonds has risen 96 basis points in the past 12 months to 4.53 percent.

Quickening consolidation may be a solution, as the renewable energy industry has demonstrated, S&P Capital IQ’s Zino said. The process “creates a healthier solar space that allows the industry to stand alone. Policy makers have finally got it right.”

To contact the reporter on this story: Justina Lee in Taipei at jlee1489@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net; Sandy Hendry at shendry@bloomberg.net

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