Deadly China Pollution Breathes New Life Into Solar Debt

China’s pledge to reduce pollution after air-quality in Beijing hit hazardous levels on 20 days last month has cut financing costs for the world’s biggest maker of solar wafers to a four-month low.

The yield for February 2015 notes of GCL-Poly Energy Holdings Ltd. has fallen 109 basis points from a six-month high on Dec. 27 to 5.793 percent, the lowest since Sept. 12. That’s more than the 17 basis point drop in yields for three-year AAA corporate debt tracked by ChinaBond. China’s six biggest solar companies, which have $2 billion of outstanding bonds, may post losses of more than $2 billion in 2012 on a glut in supply of panels, according to analyst estimates compiled by Bloomberg.

China announced plans to raise its solar-power installation target for 2015 by 67 percent at the end of January as smog covering the city of 20 million people forced authorities to shut factories, take government cars off the road and warn children and the elderly to stay indoors. Five-year bonds sold by Solarworld AG, Germany’s biggest solar company, have plunged to 22 cents on the euro as deficit curbs in the U.S. and Europe slashed subsidies for the industry.

“All renewable equities and bonds are increasing in price on anticipation of further support plans for the environment,” said Charles Yonts, an analyst at CLSA Ltd. in Hong Kong. He added that there are “increasingly clear indications from Beijing that they will keep these companies alive.”

Greenhouse Gases

China, which surpassed Japan in 2010 to become the world’s second-biggest economy, has also grown to be its biggest emitter of greenhouse gases. The nation added 15.1 million new cars last year, a number that exceeds the total number of vehicles on its roads in 1999. It has 16 of the 20 most-polluted cities globally, according to the World Bank.

Exposure to PM2.5 pollution, fine air particulates that pose the greatest risk, contributed to 8,572 premature deaths in Beijing, Shanghai, Guangzhou and Xi’an in 2012, according to estimates by Greenpeace and Peking University’s School of Public Health. Beijing’s daily average for January, based on the U.S. Embassy readings, was 196 micrograms per cubic meter, compared with an average of 167 measured last year in 16 U.S. airport smoking lounges by the Centers for Disease Control and Prevention in Atlanta.

Beautiful China

Hu Jintao, set to step down as president next month, called for ensuring “ecological progress” and creating a “beautiful China” when addressing the November congress where Xi Jinping succeeded him as head of the party. Li Keqiang, in line to replace Wen Jiabao as premier next month, said on Jan. 15 that environmental laws must be enforced.

Shi Dinghuan, an adviser to the cabinet and president of the Chinese Renewable Energy Society, said the government plans to increase its target for solar-power installations by 2015 to 35 gigawatts from the 21 gigawatts set last year. “We’ve got more pressure to save energy and reduce emissions as smog worsens due to pollution,” he said in a Jan. 30 interview.

Solar panel manufacturers including Suntech Power Holdings Co. and Yingli Green Energy Holding Co. have faced weaker demand and a supply glut that has driven panel prices down by 25 percent in the past year. GCL-Poly produces the polysilicon and solar wafers that are used to produce the panels.

Distressed Debt

LDK Solar Co., the second-biggest maker of wafers, has more than $375 million of outstanding bonds, according to data compiled by Bloomberg. The price of its February 2014 yuan bonds settled in U.S. dollars has rallied to 74.59 from as low as 26.25 on Sept. 17.

LDK said Jan. 31 that it received approval for a 440 million yuan ($71 million) loan from state-owned China Development Bank Corp. to upgrade its Mahong polysilicon facility. The company, which reported a loss of $137 million for the third-quarter, sold a 19.9 percent stake in November to a company part-owned by the government of Xinyu, the city where it’s based, in exchange for receiving financial support.

Convertible notes of Suntech, based in the eastern city of Wuxi, rose this year to 47 cents on the dollar after sinking to a four-year low of 25.13 on Dec. 6. The company is working with banks and bondholders to reorganize the debt before it comes due on March 15. It hired UBS AG to evaluate alternatives.

Profit Outlook

“Profitability of solar-energy manufacturers will turn better in 2013 as selling prices rebound,” said Jerry Weng, a Shanghai-based analyst at KGI Securities Co. “We see their utilization rates of production increasing to 70 percent from 50 percent a year earlier as market demand picks up.”

Weng expects global solar power demand to rise by at least 15 percent in 2013 from about 30 gigawatts last year. The government will help the industry issue new debt and negotiate with banks to protect jobs and investment, he said.

Changzhou, China-based Trina Solar Ltd., the world’s third-biggest maker of solar panels, said yesterday hedge fund Citadel LLC had acquired a 6.2 percent stake in the company.

The government allocated 13 billion yuan in subsidies for domestic solar project developers in 2012, the official Xinhua News Agency reported in December. This year, policy makers have accelerated investment-project approvals to spur the economy. Gross domestic product is expected to grow 8.1 percent in 2013, accelerating from 7.8 percent last year, according to the median estimate of 47 analysts surveyed by Bloomberg News.

China’s benchmark 10-year government bond yield climbed to 3.60 percent yesterday from as low as 3.24 percent on July 11. Top-rated corporate debt with similar maturities pays 5.24 percent, down five basis points this year.

The cost of insuring China’s debt against non-payment with credit-default swaps has increased one basis point this year to 67.8 basis points as of yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. The yuan gained 0.1 percent to 6.2277 per dollar in Shanghai today.

Trade War

The European Union is investigating anti-subsidy and anti-dumping complaints against Chinese companies by a group of European solar panel makers. China, in its turn, is investigating European polysilicon makers for the same practices, showing its backing of the industry.

“The solar industry is government-directed and Chinese policies are signaling obvious support, stimulating speculation that solar companies will benefit,” said Wang Xiaoting, a Beijing-based solar analyst from Bloomberg New Energy Finance. “Global demand for solar panels will have quite stable growth this year especially because of China.”

— With assistance by Feifei Shen

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