Monday, May 20, 2013

What is Suntech Worth? ($STP)

Suntech Power - the holding company - owns stakes in a handful of subsidiaries e.g. the Wuxi manufacturing sub and the Global Solar Fund. Knowing what we know about the current fate of these subsidiaries, why does anyone think that the holding company securities have any value?

There's over a billion dollars in subsidiary bank loans, and these bank loans are guaranteed by the holding company, meaning that even if the holding company had equity in one subsidiary it would need to make the bank lenders to other subsidiaries whole before it could keep any proceeds. Thus, the math is not, "is any subsidiary solvent?", but rather, "are all the subsidiaries solvent?".

The bonds are now trading at about 27, a market value of $146 million and implying a loss of $395 million for bondholders, while the company market capitalization is $150 million!

In other words, the bondholders think that the holding company is worth $146 million and the equity investors think it is worth $691 million. A difference of half a billion dollars!

Sooner or later, that difference will be reconciled.


jHurt said...

Here's why its up:

Suntech negotiates new repayment deadline with bondholders
IHS Global Insight Daily Analysis
Olivia Boyd

Suntech Power Holdings Co., formerly the world's largest photovoltaic (PV) solar manufacturer, has reached a new forbearance agreement with the majority of holders of the company's 3% convertible notes. Under the agreement repayment of USD541 million in debt will be delayed until 28 June, after Suntech defaulted on the bonds originally due for repayment on 15 March (see China: 18 March 2013: ). The bond holders include institutional investors, including the US-based hedge funds Mount Kellett Capital Management with 12.14% of the company’s bonds and Driehaus Capital Management with 11.04%.

Significance: The agreement buys the company extra time to produce a restructuring plan, after Suntech's main operating subsidiary, Wuxi Suntech, declared bankruptcy in March this year (see China: 21 March 2013: ). The restructuring plan will need to demonstrate that the company has learnt from the business practices that caused its dramatic downfall. At a time when market glut of photovoltaic solar panels was building up to serious overcapacity, Suntech continued to maintain large inventory levels, according to analysis from IHS Emerging Energy Research. Suntech was also heavily reliant for PV module orders on an investment firm, Global Solar Fund, in which both Suntech and Suntech's former CEO Shi Zhengrong held significant stakes, according to a report from Bloomberg. Global Solar Fund provided capital to a number Suntech customers in Italy that were struggling to raise finances to pay for their projects, many of which remained unbuilt. To secure financing for one of these projects, a Global Solar Fund executive backstopped its loans with EUR560 million in German government bonds, which were later found to be fraudulent. When the fraud was discovered, Suntech was forced to restate past earnings, effectively erasing USD60 to USD80 million of past earnings from the company's 2010 balance sheet, plus additional losses in 2011 and 2012. It is widely expected that Wuxi Guolian, a financial conglomerate controlled by the city government of Wuxi, will acquire and restructure Suntech's main operating subsidiary in an effort to turn it back to profitability and protect local jobs. For the parent company, the prospect of bankruptcy remains very real, if bondholders decide to exercise their rights and claim repayment in June.

CP said...

That amounts to nothing.

Why do you think the bonds are still offered at 30? The bond market is saying the holding company is worth $160 million and the stock market is saying it's worth $734 million.

jHurt said...

Agree equity is worthless, just the PR i posted looks to be the reason the lottery ticket $ drove the stock 46% higher today.