LDK Delinquency Flags Chance of Another China Solar Bust

LDK Solar Ltd.’s failure to fully pay notes this week has raised the prospect of China’s second solar-industry failure this year as the company needs to repay a loan 10 times larger by June.

The world’s second-biggest maker of wafers that convert sunlight into power couldn’t repay all of the $23.8 million of dollar-denominated convertible bonds that matured on April 15, according to a company statement yesterday. Before the delinquency, its 2014 yuan notes dropped below 50 yuan per 100 yuan face value, according to data compiled by Bloomberg. The yield reached a six-month high of 125 percent last week, compared with the 79 percent for Bonn-based Solarworld AG.

LDK, which will probably report a second year of losses tomorrow, must repay a $240 million loan unless it spins off its polysilicon unit by June 3, according to regulatory filings. Suntech Power Holdings Co., once the world’s largest panel maker, was dragged into insolvency days after it defaulted on a $541 million bond repayment on March 15.

LDK failed to repay about $7 million of bonds for which it could not reach a settlement, and may receive a notice of default, said Edward Guinness, a fund manager at Guinness Atkinson Funds in London who oversees about $800 million, including a “tiny” position in LDK.

“It’s out of LDK’s hands,” he said in an interview yesterday. “The lenders can choose to give them an extension. It’s up to them to push LDK into bankruptcy.”

LDK’s Position

LDK wasn’t expected to miss the bond payment, said Amit Jain, a Bangalore-based analyst at SJS Markets Ltd. “Everyone knows that cash flows are stressed but there was a feeling that the company would be able to manage this one,” he said.

LDK officials in San Francisco and at its headquarters in Xinyu, China, couldn’t be reached for comment. Chief Financial Officer Jack Lai wasn’t available, and phone calls and e-mails to his office went unreturned. Two calls and an e-mail seeking comments from Li Longji, a company spokesman in Xinyu, weren’t answered.

LDK, which had net debt of $3.13 billion at the end of September, was unable to fully pay the bonds due April 15 because of “a temporary cash-flow shortage,” according to the statement. The company has reached a settlement with two convertible notes holders on the partial payment of a principal amount of $16.55 million to postpone the repayment of remaining debt. The manufacturer is “ready and willing” to discuss settlement for the remaining notes, it said.

Solar Glut

Flush with credit from state lenders, Chinese solar companies more than tripled production between 2008 and 2011. That helped drive a 17 percent decline in the cost of panels in the past year as demand slowed, according to data compiled by Bloomberg.

Mounting losses are making it harder for China’s five-biggest solar makers to repay more than $1.7 billion in outstanding bonds.

At LDK, the loss for 2012 may reach $669 million, according to estimates from China International Capital Corp., the country’s biggest investment bank. That would be more than the loss of $655.5 million in net income available to common shareholders in 2011, according to data compiled by Bloomberg.

LDK received its $240 million loan in June 2011 in the form of convertible preferred shares, according to a May 15 filing to the U.S. Securities and Exchange Commission. China Development Bank Corp., China Construction Bank Corp., Bank of China Ltd. and their affiliates bought the shares, which are convertible into a stake of LDK Silicon & Chemical Technology Co., a unit that makes polysilicon, the raw material used in most solar panels.

Repayment Rights

The three state-backed lenders can force LDK to redeem the shares at the subscription price plus 23 percent interest if it hasn’t spun off the polysilicon maker by June 3, according to the filing.

The chances of LDK spinning off the unit are slim, Shyam Mehta, an analyst at GTM Research in New York, said in an interview. Spot prices of the commodity were $74 a kilogram when the company sold the convertible shares, and haven’t been above $50 since September 2011, according to Bloomberg New Energy Finance.

“It’s not completely impossible, but it’s likely to be sold for pennies on the dollar,” Mehta said.

China Development Bank didn’t reply to an e-mail and fax seeking comment, and calls to China Construction Bank’s officials weren’t answered.

In December, LDK hired Citigroup Inc. to help renegotiate its liabilities. It won agreement to amend the terms of its notes due in 2014 to allow LDK Silicon to issue as much as $200 million of separate redeemable convertible shares.

Suntech’s Example

The lenders may be able to dilute the stake of LDK’s shareholders and force parts of the company into a court-supervised restructuring like the one under way at Suntech. The two manufacturers have the most debt of the eight Chinese solar-cell makers in the Bloomberg Global Large Solar Energy index of 17 companies.

“People are questioning if LDK will have a similar endgame,” Alex Morris, analyst at Raymond James & Associates Inc. in Houston.

Average yields on LDK’s 10 percent notes due in February 2014 have soared to 118.8 percent from 67.8 percent on Dec. 31. That contrasts with the fall in borrowing costs for top-rated Chinese companies, as the yield on AAA corporate debt due in 10 years has slid 20 basis points this year to 5.09 percent. The benchmark 10-year government bond yields 3.4 percent.

Market Prices

Slowing growth in the world’s second-biggest economy has pushed up the cost of insuring the country’s sovereign notes. China’s gross domestic product rose 7.7 percent from a year earlier in the first quarter, down from 7.9 percent in the previous three-month period.

Five-year credit-default swaps have risen 3.7 basis points this year to 70 basis points. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower defaults.

The yuan climbed to 6.1798 per dollar yesterday, the strongest level since the government unified official and market exchange rates at the end of 1993. It gained 0.1 percent to close at 6.1832 per dollar in Shanghai, according to prices from the China Foreign Exchange Trade System.

The rise in borrowing costs for Chinese solar companies follows failures of competitors overseas. Solyndra LLC, the U.S. solar-panel maker that received a $535 million loan guarantee, went bankrupt in 2011. Evergreen Solar Inc., the U.S. manufacturer that blamed competition from Chinese state-backed makers for its collapse, filed for bankruptcy the same year.

Restructuring Need

Chinese solar companies that are unable to meet payments should also be closed down like Solyndra and Evergreen Solar, said Pavel Molchanov, analyst at Raymond James & Associates Inc. in Houston.

“They need to be restructured at the plant level so that capacity is taken out of the market,” Molchanov said. “If Suntech got bailed out, I’d say the risk for LDK were low, but they didn’t.”

The government is working to consolidate industries where there’s overcapacity, the National Development and Reform Commission, China’s top planning body, said on March 5. China Securities Journal reported yesterday that the country may issue entry requirements for the industry in the first quarter and stop funding for projects that fail to qualify.

“I don’t think there is any desire on the Chinese government’s part to support these manufacturers,” said Jigar Shah, partner at clean-energy investment company and developer Inerjys Ventures Inc.

Default Trigger

Eight Chinese banks pushed Suntech’s main unit into bankruptcy in a court in China three days after its default. LDK’s liabilities leave it vulnerable to a similar reshaping, said Greg Sheppard, senior director of research at IHS iSuppli, a consulting company based in El Segundo, California. LDK has a 50 percent chance of surviving, he estimates.

The manufacturer has agreed to sell its stake in unit LDK Solar High-Tech (Hefei) Co. to an affiliate of the municipal government of Hefei, in China’s Anhui province, according to a statement yesterday. LDK expects to realize a net loss of $80 million to $90 million on the sale, it said.

China had 330 solar manufacturers in 2008 and wants no more than 15 operating within five years, said Li Junfeng, director of climate-change research at the NDRC. In an interview on March 13, Li blamed Suntech’s problem on “government intervention” and said officials shouldn’t save the manufacturer.

“The government is very pro-rationalization,” said Jenny Chase, lead solar analyst at Bloomberg New Energy Finance in Zurich. “What’s gone against that is the local governments, which want to maintain employment. There comes a point when it’s beyond their power to do so.”

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