Record Clean-Energy Debt Due in Quarter Spurs Risk: China Credit
China’s clean energy industry faces record debt payments this quarter, heightening a battle for survival after a solar panel maker became the country’s first onshore bond issuer to default.
Companies generating power from the sun, wind and water must pay the equivalent of $4.2 billion in onshore and offshore notes by June 30, data compiled by Bloomberg show. The average yield on five-year AA rated securities has jumped 171 basis points in the past year to 7.3 percent on concern over delinquencies. That compares with 2.86 percent on corporate bonds globally, Bank of America Merrill Lynch indexes show.
While China’s government is speeding up the development of zero-emission technologies as it battles smog an official adviser called “intolerable,” it refrained from intervening to help Shanghai Chaori Solar Energy Science & Technology Co. (002506) meet its debts last month. Notes of Baoding Tianwei Baobian Electric Co. were suspended from trading last month after the solar-cell maker reported losses, and Sinovel Wind Group Co. (601558) said its securities may also be delisted.
“The worst isn’t over,” said Shi Lei, head of fixed-income research in Beijing at Ping An Securities Co., a unit of the nation’s second-biggest insurer. “Many solar or wind companies rely on foreign or domestic government subsidies. It’s possible that another company in the industry may default.”
Eleven out of 33 publicly traded alternative energy companies have a debt-to-equity ratio exceeding 100 percent, adding to concerns defaults may spread after Premier Li Keqiang said that some corporate failures may be unavoidable. The average debt-to-asset ratio for China’s solar bond issuers rose to 72.1 percent as of the end of September from 63.9 percent in 2011, according to a March 24 report from China Merchants Securities Co.
Environmental degradation prompted China, which the World Bank estimates has 16 of the world’s 20 most-polluted cities, to increase investment in clean energy over the past decade. The world’s biggest carbon emitter poured $61.3 billion into the industry last year, exceeding $48.4 billion in the U.S., according to figures from Bloomberg New Energy Finance.
Authorities are now trying to cut capacity in the solar and other green-energy industries after overproduction caused equipment prices to tumble. China’s wind-turbine and solar-power industries face “relatively large pressure” from excessive capacity, the State Council said last year. Shang Fulin, Chairman of China Banking Regulatory Commission, the nation’s banking regulator, said March 11 that it will seek to limit lending to industries with overcapacity.
“Solar companies are still facing overcapacity problems,” said Li Ning, a Shanghai-based bond analyst at Haitong Securities Co., the nation’s second-biggest brokerage. “Some need to cope with a heavy debt burden. We can’t exclude the possibility that the next default may happen in the industry.”
Five out of 12 companies flagged by China International Capital Corp. as having outstanding onshore bonds in “great need” of more scrutiny after credit-profile changes were in the green-energy industry. The borrowers are Yingli Energy (China) Co., Sinovel, Baoding Tianwei, LDK Solar Co. and Sanan Optoelectronics Co. (600703) Yingli Energy must pay interest on May 3 on bonds due 2015 and 2017, according to data compiled by Bloomberg.
Sinovel has forecast net losses will widen to 3 billion yuan ($483 million) in 2013 from 582.7 million yuan in 2012, allowing the Shanghai exchange to invoke a suspension within seven trading days of its earnings report. The results are due April 22, according to Shanghai exchange data.
Baoding Tianwei (600550) reported a net loss of 5.23 billion yuan in 2013 versus a 1.55 billion yuan earnings deficit in the prior year. China Lianhe Credit Rating Co. downgraded Baoding Tianwei’s rating from AA to A+, according to an exchange statement on March 31.
LDK, once the world’s second-biggest maker of solar wafers, failed to pay 1.7 billion yuan of maturing bonds at the end of February. The company had $2.8 billion in debt at the end of the third quarter and hasn’t reported a profit since the first quarter of 2011.
The yield on LDK Solar’s onshore yuan bond due December 2014 has almost doubled in the past year to 20.7 percent, according to data compiled by Chinabond, the nation’s biggest debt clearing house. The rate on Sinovel Wind’s 6 percent debenture due 2016 has more than doubled to 12.83 percent, according to exchange data. Investors have an option to sell the notes to the issuer in December.
Rising demand for solar panels is countering a global oversupply that erased profits across the industry and bankrupted more than a dozen companies. Developers installed 37.5 gigawatts of panels worldwide last year, up 22 percent from 2012, and that figure may increase as much as 39 percent this year, according to data compiled by Bloomberg.
“What is left now is a few big players or niche companies with decent financial capabilities,” Pranab Kumar Sarmah, head of clean energy and technology research in Hong Kong at AM Capital Ltd., said in a phone interview yesterday. “We will continue to see some consolidation among the smaller ones. There’s no denying that some of them could face problems like Shanghai Chaori but I don’t expect any big name to leave the industry this year.”
Zhang Jianming, a Hong Kong real-estate tycoon, has spent or pledged about $533 million accumulating stakes in failing solar companies and now holds 23 percent of LDK Solar through various holding companies. He also got involved in the rescue of Suntech Power Holdings Co. The average spot price of polysilicon, which is used in solar cells, climbed 23 percent in the past year to $21.67 per kilogram on March 10, according to Bloomberg New Energy Finance.
Concerns have increased that defaults may spread as the world’s second-largest economy cools. Policy makers have set a 7.5 percent growth target for 2014, which would be the slowest since 1990. Credit-default swap contracts insuring the nation’s debt against non-payment have climbed 12 basis points this year to 92 basis points, prices from data provider CMA show.
The yield on China’s benchmark 10-year sovereign bond has dropped 1 basis point this month to 4.49 percent. That leaves the premium investors demand to hold top-rated similar-maturity corporate securities at 167 basis points, up from a low for the year of 138 last month.
Lawrence Lu, senior director of corporate ratings at Standard & Poor’s in Hong Kong, said China’s next default on borrowings, including bonds and bank loans, will most likely be in the solar, steel or shipbuilding industries.
“The three industries are overcapacity industries,” Lu said. “Their fundamentals are very bad because of the slowing economy.”