Thursday, May 23, 2013

Are the Suntech Bondholder Negotiations a Blowoff? Was The Chinese Mercantilist Plan For Suntech To Be Worthless All Along? $STP

Yesterday we suggested a theory that what happened with Suntech would make sense as part of Chinese plan to capture the photovoltaic solar industry at the expense of foreign investors.

Raising capital through a holding company that funnels money to China would allow a huge capacity build up, which could be followed by dumping of product that drives non-Chinese competitors out of business. After that, it would be time to foreclose on the loans to the operating subsidiary, leaving the overseas holding company with nothing.

If this theory is correct, what we are witnessing right now is the "blow off", where the marks who invested in the holding company need to be let down gradually. If the Chinese were blowing off the holding company bondholders, they wouldn't explicitly decide yes or no on a bailout but just keep the conversation going. How long would it take for the bondholders to get tired of the legal fees and aggravation and just sell and move on?

A correspondent with an infallible nose for smelling the story behind the story writes in,

At the outset, not knowing the future with any certainty, the corporate structure was designed to guarantee a "heads I win, tails you lose" outcome.

In the long run the important point is that the Chinese see enough long term value in this industry to want to own it, and terrorize its competitors into abandoning it.

That is the signal buried in the noise.
What is so striking about Suntech is the allegation from the Kent Ji shareholder derivative lawsuit (3:12-cv-06409-JST) against Shi et al that in 2007 Shi began "hollowing out Suntech by transferring its cash to, and using its employees for the benefit of, Asia Silicon Qinghai".

If that's true, why would Shi do that given that he was the largest holder of holding company equity (then trading ~$30) that appeared to have a prosperous future? Did he know that the holding company really had no future? Is that why Suntech did not disclose that Shi was a cofounder of Asia Silicon?

By the way, another benefit for the Chinese (if this was their mercantilist plan) is that they have poisoned the well for alternative energy companies in the US. The investors in ADRs of Chinese PV companies and in U.S. alternative energy companies have gotten their clocks cleaned.


Anonymous said...

Sometimes, however, a mark is not quite prepared to accept his loss as a gain in experience and to say and do nothing about his venture. He may feel moved to [p. 452] complain to the police or to chase after the operators. In the terminology of the trade, the mark may squawk, beef, or come through. From the operators' point of view, this kind of behavior is bad for business. It gives the members of the mob a bad reputation with such police as have not. yet been fixed and with marks who have not yet been taken. In order to avoid this adverse publicity, an additional phase is sometimes added at the end of the play. It is called cooling the mark out After the blowoff has occurred, one of the operators stays with the mark and makes an effort to keep the anger of the mark within manageable and sensible proportions. The operator stays behind his team‑mates in the capacity of what might be called a cooler and exercises upon the mark the art of consolation. An attempt is made to define the situation for the mark in a way that makes it easy for him to accept the inevitable and quietly go home. The mark is given instruction in the philosophy of taking a loss.

A related procedure for cooling the mark out is found in what is called stalling. The feelings of the mark are not brought to a head because he is given no target at which to direct them. The operator may manage to avoid the presence of the mark or may convince the mark that there is still a slight chance that the loss not really occurred. When the mark is stalled, he is given a chance to become familiar with the new conception of self he will have to accept before he is absolutely sure that he will have to accept it.

altampd said...

I own the bonds and puts on the equity and received this letter yesterday from Wilmington Trust in response to an inquiry I had sent them. Doesn't say much but gives credence to the notion that the equity is worthless.

John said...

Thanks for posting altampd...When do you see this playing out...I own sept puts in case company stalls longer. Do you think there will be resolution by June 28?

Anonymous said...

About Shi, I think it can just be greed. Owning 100% of something is better than owning a share of it.

Steve said...

My biggest fear with an STP put is that the bondholders won't force STP into bankruptcy ever because they know there will be ZERO recovery... even for the BOND holders... because there are no assets left.

Hence, STP becomes a perma-zombie stock.

Anonymous said...

STP will get de-listed by the NYSE sooner or later. Once that happens the ETFs will no longer invest and it will sink like a stone.

eah said...

I know many Chinese 'businessmen' and government officials are criminal scum. I just don't think that many of them are extraordinarily intelligent conniving criminal scum that they could think up a scam like that; if such speculation about the killing off of foreign competitors and disillusionment of potential future investors in the west turns out to be true, it's likely just an unintended consequence of ordinary plundering of the 'reverse merger' variety that the Chinese have already shown they are so suited for and good at.

Anonymous said...

Holdco bondholders?:

"The operator may manage to avoid the presence of the mark or may convince the mark that there is still a slight chance that the loss not really occurred."