China’s Solar Wall Sparks REC Bondholder Revolt: Nordic Credit

China’s latest salvo in a solar energy trade dispute is threatening to derail a plan by Renewable Energy Corp. ASA to split the company as bondholders balk at the prospect of losses.

China’s plan to impose import tariffs as high as 57 percent on polysilicon shipped from the U.S. and South Korea may see REC bondholders scupper a spinoff of its solar wafer, cell and panel units as they’re left with less cash from polysilicon operations to service their debts.

“If they’re able to go through with the split, it will have to be on improved terms for bondholders,” Arne Eidshagen, who helps manage about 7 billion kroner ($1.2 billion) in corporate debt at Alfred Berg Asset Management in Oslo, said by phone. “We’ll probably not vote for it as the arrangement stands but that’s not final.”

REC, which has been battling falling prices amid industry overcapacity, needs bondholder approval to proceed with a plan to sell its solar unit to existing shareholders in a deal that values the business at 800 million kroner ($135 million). The company will leave all the debt with the silicon business, where Chinese tariff plans have put earnings at risk.

Little Chance

After sliding on July 18, the day of the announcement of both the split and the tariffs, yields on the company’s 11 percent September 2014 bond have been little changed at about 9.97 percent, according to DNB ASA pricing compiled by Bloomberg. That compares with an increase of 35 basis points in yield on the 9.75 percent bond maturing May 2018.

“There is little chance for REC to stay competitive in the Chinese market,” Jason Channell and Phuc Nguyen, analysts at Citigroup Inc., said in a note last week.

Sandvika, Norway-based REC, the world’s lowest cost producer of polysilicon, is among companies to receive the highest anti-dumping duty of 57 percent on its exports from two U.S. plants to China.

The Chinese decision marks the preliminary ruling in a probe opened last year. It’s a response to a U.S. decision in 2012 to impose tariffs of as much as 250 percent on Chinese solar panels after a plunge in prices led to the bankruptcy of manufacturers such as Solyndra LLC, which was based in Fremont, California.

“Had it not been for this tariff, it would have been easy to say that this is a good idea,” Eidshagen said. “Given the tariff, then you need to be concerned that some of the future earnings will now reside in REC Solar. That’s much more of a problem now.”

‘Unfortunate’ Decision

REC reported second-quarter earnings before interest, taxes, depreciation and amortization of 152 million kroner, with polysilicon and silane gas contributing 106 million kroner. That compares with Ebitda of 75 million kroner for the wafer, cell and solar panel unit.

While the Chinese decision is “unfortunate” the merits of the proposed split still stand, including 800 million kroner in new equity from investors and a reduction in refinancing risk, according to REC Chief Financial Officer Kjell Christian Bjoernsen.

“Such a significant increase in new equity is a significant strengthening of the whole business system,” he said by phone on July 24. “The current deal as proposed should be something that we would hope they would be able to support in bondholder meetings.”

The split will boost the cash holding of REC ASA, the polysilicon-making parent, by about 500 million kroner, adding to the 1.6 billion kroner in cash and cash equivalents at the end of the second quarter, ahead of the maturity of 1.9 billion kroner of bond debt due next year.

“There’s an interesting difference of interest for holders in different bonds,” Eidshagen said. “If you own the 2014 bonds then you should definitely vote in favor but if you own the longer bonds then it’s a much tougher decision.”

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