Suntech Power Holdings’ struggle to shore up enough capital to repay global investors the US$541 million owed on March 15 may taint the refinancing efforts of other Chinese solar panel companies with bonds due in the coming months, say analysts, who predict that several will exit the public debt capital market (DCM) in favour of bank loans.
Wuxi-based Suntech Power, which is one of the world’s largest producers of solar panels, has less than a week to come up with the US$541 million or else default on its convertible bond. This would likely file for bankruptcy. The company has a market value of less than US$220 million and debt obligations of approximately US$2 billion. It posted third quarter revenue of US$387 million, or a 50% drop from the previous year.
“No one knows what the answer for Suntech is. It is probably propositioning lenders to take a haircut, but investors are able to think rationally about this and it’s going to be very difficult for Suntech to make it out unscathed,” said one China-based lawyer away from the deal. “Even bigger, though, is what this means to the other China solar companies that need refinancing.”
As part of China’s push for to develop its renewable energy sector, the solar energy industry had been a central focus of the State Council’s last two five-year plans, which attracted global investors to the industry. Following the release of China’s 2006-2012 plan, a handful of companies sought to list in overseas markets and issue equity-linked and straight debt products in international currencies, including the US dollar and offshore renminbi, or CNH.
However, the China’s solar industry suffered from waning global demand for panels following the financial crisis, resulting in over-supply and cost-cutting and US$17.5 billion of losses by 2012, according to the New York-based Maxim Group.
While the government now looks to reform the industry through consolidation, companies with bonds due in may be caught in the crossfire.
At least five companies - China Sunergy, JA Solar Holdings, LDK Solar, Suntech Power and Trina Solar - will see US$1.5 billion of convertible bonds mature in 2013, according to data provider Dealogic.
Four more - Baoding Tianwei Yingli New Energy Resource, JiangXi LDK Solar Hi-Tech, LDK Solar and Solargiga Energy – will see about Rmb2.85 billion (US$458 million) of CNH-denominated bonds due in 2014 and 2015.
“Most of the bonds issued by solar companies are expiring 2013 to 2015 because a lot of these were issued in 2008 when the industry was promising,” explained the China-based lawyer. “A large chunk of these will be due in the next couple of years, and if the renewable energy market doesn’t pick up companies’ cash flow is really going to be constricted. Suntech is the most public company facing issues, but refinancing will be incredibly difficult for this industry.”
Bankers say that many of these bonds’ secondary market performance has already been impacted, though performance may drop even lower if Suntech defaults on its payment this week.
“Appetite for these existing bonds and future bonds from this industry will be affected on a case-by-case issue. But right now investors still feel that the industry is backed by the government and China will actually save every issuer – Suntech is going to be a wake up call,” said one Hong Kong-based DCM banker. “No one knows what will happen in China, but if you look at the current prices of these bonds, they are trading well below par.”
Until July, Suntech’s bond was trading at approximately 65-70 but dropped to 55 earlier this year and to 36 by March 8.
Trina Solar, which has a stronger financial position than Suntech, has convertible bonds due July 15 which are trading at 99, though its bonds were trading at 90 late last year. JA Solar’s convertible bonds, due May 15, were at 80 over the summer but have now risen to 95.
However, bankers say that it will be difficult for any of these companies to tap the public market to refinance these bonds given the volatile state of the solar industry and the precedent set by Suntech.
“The market won’t help them – the government is the only one that can help these companies with financing,” said one credit analyst. “It’s going to be very tough for them to remain in the public market unless they pay up by something like 400 basis points (bp) – that’s impossible. Trina’s trading at 8% - which isn’t actually too bad – but it might have to go something like 12%...Unless they have amazing balance sheets, they’re not going to be seen as China solar companies – they’re going to be seen as distressed players.”
While not all of these companies have distressed cash flows, the pricing differential between bank loans and the public market will be enough to push them towards loans. This is especially true as China’s solar industry undergoes the planned consolidation, which would otherwise add another level of uncertainty to the future of companies.
“Trina Solar is by no means some sort of distressed bond, and in normal market conditions it would be able to tap the public market for financing just fine, but given the news flows regarding the Chinese solar companies and anti-dumping and demand for solar, it’s a very noisy situation. I have no idea in that case if there will be any interest,” said the credit analyst. “We’re not seeing a lot of resolution quite so soon.”
Mainland banks may also be wary to extend loans to these companies for the same reasons, but given the ongoing support by the government, they will be more inclined to lend and at more favourable rates.
“State-owned banks are not big on extending new credit facilities to this industry, but they can be expected to endorse companies if that’s the government’s aim,” said the credit analyst. “It’ll be on a case-by-case basis, but banks may be able to lend hundreds of basis points less than the market in the US. It depends on investors’ perception.”