Suntech Probes Potential Fraud on $680 Million Guarantee

Suntech Power Holdings Co., the world’s biggest solar panel maker, said it may have been the victim of a fraud involving a 554.2 million euro ($680 million) financing guarantee it extended in 2010.

The Chinese company listed in New York said it’s suing Javier Romero, a former Suntech sales representative who manages an affiliated company that Suntech says pledged German bonds as collateral for payment guarantees. The bonds, Suntech said in a statement today, may never have existed.

Suntech said it may delay its second-quarter earnings report while it evaluates the financial impact of the incident, which involves an affiliated company responsible for $348.6 million in sales for Suntech over the past three years. The fraud may complicate talks Suntech is having with banks about extending credit lines necessary to fund operations.

“This makes it very difficult for Suntech to raise any equity in the U.S.,” said Adam Krop, an analyst at Ardour Capital Partners in New York who has a sell rating on the shares. “They’re going to need support from their Chinese lenders” to meet their debt obligations. Suntech shares fell 15 percent to $1.34 at the close in New York.

The company discovered the potential irregularities as it sought to sell its stake in the investment company managed by Romero, Global Solar Fund S.C.A., Sicar, partly to meet debt obligations due next year, Zhengrong Shi, Suntech’s chairman and chief executive officer Shi said in a conference call today.

Liquidity Gap

This monetization process was part of its plan to pay 2013 convertible notes and is now on hold. To close the liquidity gap, Suntech has said it’s seeking additional bank financing, drawing on credit lines and tapping both equity and debt markets for cash.

Suntech is pursuing a “possible” credit facility and is considering a local bond issuance in China, Shi said today. The company will provide an update on the matter in the week of August 20.

“We now suspect that the German government bonds may not have existed and that Suntech may have been the victim of a fraud,” Zhengrong Shi, Suntech’s chairman and chief executive officer, said in the call. “We are in discussion with our major banking partners and we believe that this development will not materially impact our banking relationships.”

‘Significant’ Debt

Suntech has “significant” outstanding debts and liquidity issues that may risk its viability as a going concern, the company said when it released its first-quarter results in May. The company had net debt, reflecting total debt less cash and restricted cash, of $1.6 billion at the end of March and short-term liabilities of $3.1 billion, a record high. The outstanding principal on its 2013 convertible bonds was $541 million.

Suntech has filed claims “against relevant parties in multiple jurisdictions” to assert control of Romero’s company and its assets, which include solar projects with 145 megawatts of capacity in Italy, the solar company said.

Romero worked for Suntech in Spain as a non-executive sales representative selling solar panels. In June 2008, Suntech invested in Global Solar Fund, which was set up to make investments in power plants and was managed by Romero. Shi, the Suntech chairman, has a 10.67 percent stake in the partnership company that controls GSF and Romero holds another 10 percent.

The Chinese solar company invested a total of 258 million euros in GSF, taking as much as 86 percent of the company. Between 2009 and 2011, GSF sold $356.8 million of Suntech solar panels through seven affiliated companies working in Spain and Italy, according to Suntech’s 2011 annual 20-F filing in April.

Chinese Bank

In May 2010, Suntech guaranteed 554.2 million in payment obligations for GSF under a finance facility provided by China Development Bank Corp., the state-owned lender based in Beijing. As security for Suntech’s obligations under the guarantee it received a pledge of 560 million euros in German government bonds held by an affiliate of GSF called GSF Capital Pte Ltd., which was an investor in the GSF fund.

In November 2011, Suntech worked to reduce its stake in GSF by 6.7 percent, selling the interest to a company controlled by Romero. Suntech booked a loss of $30.7 million in the transaction and agreed to meet future capital costs linked to GSF, according to the 20-F filing. The transaction reduced its share in GSF to 79.3 percent. Romero could not be located for a comment. An e-mail sent to the address listed on GSF Capital’s website wasn’t returned today.

Suntech, based in Wuxi, said an outside counsel recently found facts suggesting the German bonds may not have existed. Romero and GSF Capital are listed as defendants in a case Suntech filed at the High Court in London on July 27.

Suntech’s 2011 annual report was audited by Deloitte Touche Tohmatsu CPA Ltd. Shelley Pfaendler, a spokeswoman for Deloitte & Touche LLP in Chicago, directed requests for comment to colleagues at the company’s office in Hong Kong, Rebecca Lam and Wilfred Lee, who didn’t return e-mails.

GSF Capital owns Global Solar Fund Partners S.a.r.l., a company owned by Romero that manages the fund through a board that also includes Suntech executives.

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