Heavy debts set China solar makers up for consolidation

Aug 14, 2012, 10:32 AM EDT

By Matt Daily

Aug 14 (Reuters) - As solar panel prices continue to marchlower, Chinese solar companies are struggling with heavy debtloads, triggering expectations many will be forced to seek a newinfusion of funds through takeovers or mergers.

Suntech Power Holdings could be liable for hundredsof millions in new payments after it disclosed a potential fraudby a partner, while peers such as LDK Solar, JA SolarHoldings Co, Trina Solar and Yingli GreenEnergy Holding Co are also feeling pressure.

With prices for solar panels barely covering the cost tobuild them, dozens of small Chinese solar companies are believedto have shut their doors, and equity investors have fled thesector, sending share prices of the U.S.-listed Chinesecompanies down more than 85 percent since early 2011.

Most of the Chinese solar companies will be able to stayopen only if government lenders continue to keep lines of creditopen despite forecasts of several more quarters of red ink.

"Solar as an industry is going to continue to grow," saidBrian Salerno, portfolio manager for Huntington EcoLogicalStrategy ETF. "However, my belief is that for most ofthat time it's going to be profitless prosperity."

Solar analysts have pointed to LDK Solar as also having oneof the country's most stretched balance sheets, with debt andother liabilities of $6.0 billion versus cash and equivalents ofjust $244 million.

JA Solar listed its debt and other liabilities at $1.5billion versus cash on hand of $676 million at the end of thefirst quarter,

Trina Solar's debt was a more modest $1.08 billion versuscash on hand of $490 million, while Yingli reported debt of$3.44 billion versus a cash position of $675 million at the endof the first quarter.

Suntech, which has the largest panel manufacturing capacity,may be on the hook for $690 million in collateral related to thepossible fraud, and it also has a $541 million convertible bondpayment in early 2013.

The company, which previously said it was in violation ofsome loan covenants, listed total debt and other liabilities of$3.58 billion, versus abut $474 million in cash on hand as ofMarch 31, according to a filing with the U.S. Securities andExchange Commission.

Beijing has provided billions of dollars in credit linesand other supports to its solar industry through state-runbanks, prompting the U.S. government to impose import dutiesearlier this year after some U.S. manufacturers filed a tradecomplaint.

Though analysts and solar competitors outside of China havelong viewed government bank credit lines as a major fundingadvantage for Chinese solar makers, that support has encouragedthe industry there to overspend on new factories, leading to aglut of panels on the market.

Obtaining a clear picture of the Chinese companies' debtscan be difficult, analysts said, since debts they often listedas short-term liabilities are perpetually rolled forward,essentially making them long-term facilities.

"Trina is probably the best-positioned. The cost structureis great, and they don't have as much debt as other vendors,"said Ben Schuman, analyst at Pacific Crest Securities.

Nearly every solar company has been losing cash because ofthe low panel prices, and policymakers in Beijing said last yearthey wanted to see a healthier industry develop, with a smallernumber of large, strong players.

Whether that consolidation will be spurred by Beijing or thedebt-holding banks remains unclear.

"That's the million-dollar question," said Schuman. "I don'tknow if it's really even a question of 'if' or 'when,' it's morea question of how. Is this going to be forced consolidation, ora bailout of the debt by state-owned enterprises?"



Analysts said that at least for now, Beijing was not likelyto let its leading solar players collapse.

"As long as the government has deep pockets - and they do - you might just have the walking dead," Huntington's Salernosaid.

Local governments in China have also supported the companiesin the industry that China sees as crucial to supplyingelectricity to its economy, but analysts said that supportappears to focused on keeping the local job markets strong.

LDK Solar, which cut 5,000 jobs earlier this year, receiveda helping hand in July, when the government of Xinyu city, inJiangxi province, announced it would use taxpayer funds to repaythe company's loans.

Still, Yingli Chief Financial Officer Bryan Li said theChinese state-run banks and foreign debt providers appearedwilling to support the companies with the best prospects, andwait for a sector shakeout to trim the weaker players.

"(The banks) all believe that solar is an emerging industrythat has a bright future, and a much better future after theconsolidation," he told Reuters. "They don't want to give uptheir debt presence in the solar sector."

Li said the company would post positive operating cash flowin the second half of 2012, but predicted new players wouldenter China's solar sector to take over or buy into weakercompanies.

"To a large extent, I think the capital will be coming fromthe state-owned companies, or large domestic groups," Li said.

For its part, Yingli, which tapped China's debt market forabout $236 million in May, is not interested in linking up withother companies, he said, but may seek to acquire equipment atlow cost to expand operations. (Reporting by Matt Daily in New York; Editing by Patricia Kranzand Matthew Lewis)