Pacific Money

Stormy Days for China’s Solar Industry

Problems at LDK Solar point once again to the growing financial difficulties in China’s solar industry.

Regular readers of Pacific Money will already be familiar with the problems facing China’s solar industry. Once the great hope of China’s strategic recovery from the painful events of late 2008 and 2009, the industry continues to deteriorate and, in doing so, offers great insight into the Chinese economy’s larger problems.

The latest company to hit the headlines is LDK Solar.  It has followed in the ignominious footsteps of fellow Photo-voltaic (PV) manufacturer Suntech Power Holdings Co. by failing to repay the entirety of an approximately US$24 million note which came due on Monday, thus making it the third Chinese solar company to encounter problems this year.

Pacific Money first highlighted the risks that both of these companies faced last year and since then their outlooks have continued to worsen.

LDK’s partial default this week does not bode well for the company, which is expected to post a second annual loss later in the week. Even if the unpaid bondholders do not push LDK into bankruptcy, or if a Chinese government entity rides to the rescue (as happened for Chaori Solar earlier this year), the situation will still remain grave. LDK has another debt payment coming in June – this one more than ten times larger than the partially missed amount this week.

As with many companies which seem to be facing a solvency crisis, LDK Solar as recently as late January – when it received a US$71 million loan from China Development Bank (CDB) – was still portraying the issue as just a liquidity problem. Given the massive overcapacity prevalent in the industry and the huge amount of leverage which the Chinese solar firms have built up, this doesn’t seem to be a viable claim.

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LDK’s expected annual loss announcement this week will follow its announcement in December 2012 that it laid-off 2,500 employees in the third quarter, despite having already let 9,000 workers go earlier in the year. The company still has billions of debt coming due over the next year and change, and with no strong prospects for turning a profit in the foreseeable future, only a very generous creditor indeed would step up to lend more to the company.

The good news for LDK is that China has plenty of “generous” creditors who are not known for their worries about economic viability, returns or value generating ability, there are plenty of state-owned or backed entities (be they banks, enterprises, local governments, or others) who could ride to the rescue. The question is: Will the government want to?