Monday, October 28, 2013

Letter to New York Stock Exchange About Suntech Power Listing ($STP)

A Credit Bubble Stocks correspondent has the same question raised by Vito in Barron's yesterday. I'm posting anonymously:

Ms. Ellyn L. Brown
NYSE Regulation Inc
20 Broad Street, 23rd Floor
New York, NY 10005

Dear Ms. Brown:

I manage a private investment fund and wanted to bring to your attention an NYSE listed company that appears to violate NYSE listing standards and whose continued listing brings into question the integrity of the Exchange’s surveillance and investor protection functions.  The company in question is Suntech Power Holdings Co., Ltd., ticker STP.

Suntech Power Holdings Co., Ltd. is the holding company for a troubled Chinese manufacturer of solar panels.  Recent events bring into question whether the holding company possesses the liquidity to conduct essential corporate functions.  It appears that, for all intents and purposes, the holding company may already be defunct.

To call Suntech troubled may be understating the severity of the company’s situation.  Here is a summary of recent events at the company – a quick review of company press releases will confirm most of these points:

  • Encouraged by the Chinese government, several Chinese companies built world scale solar panel manufacturing operations, resulting in a market that is massively oversupplied, with prices below costs and red ink at virtually every supplier.  
  • Suntech’s primary operating subsidiary in Wuxi, China (Wuxi Suntech) has declared bankruptcy.  Wuxi Suntech is now operating under an administrator trying to resolve over $1.8B in subsidiary level debt with Chinese banks (According to Reuters, Shunfeng has signed a preliminary agreement with the Wuxi bankruptcy administrator to acquire the Wuxi assets at price that would provide creditors with less than 30 cents on the dollar).  
  • Suntech Holdings last filed financial statements for the quarter ended March 31, 2012, over 18 months ago.
  • Suntech Holdings in March defaulted on $541MM of bonds issued in the US.   Purportedly, the company has been working on a restructuring plan with two distressed debt funds that own a majority of the bonds (current bid for the bonds is 25 cents on the dollar).  However, the last of three forbearance agreements expired at the end of August, and despite Suntech’s assurances that the restructuring plan would be disclosed during the first week of September, eight weeks have passed without any disclosure of said plan.  
  • At the end of August, the three independent directors of Suntech Holdings resigned citing an inability to "serve effectively as independent directors for reasons that included not being provided with information that was critical for them to fulfill their responsibilities.”  The directors cited a long list of issues with the company including a “severe cash flow drain.”  This manner of departure for corporate directors is extraordinarily rare and suggests severe distress at the company as well as dysfunction at the board level.
  • In June, several smaller bondholders sued Suntech for non-payment and a summary judgment against the company was issued in federal court in the Southern District of NY in September.  This month, members of the same bondholder group filed an involuntary Chapter 7 bankruptcy proceeding against the company.  The company has until November 7 to respond to the Chapter 7 filing or it automatically converts to a Chapter 7 liquidation.  Neither the court judgment nor the Chapter 7 filing has been reported by the company on Form 6-K.
To assess Suntech Holding’s viability as a going concern, it is necessary to consider its primary assets.  They are:  a) stock in the Wuxi Suntech operating subsidiary, b) a 79% interest in a solar farm entity, GSF, that was formed in partnership with a European distributor to be a captive outlet for the company’s panels, and c) ownership of various local subsidiaries outside of China.  Let’s consider each in turn.

Wuxi Suntech is in bankruptcy and attracted only two bidders after a six month search.  The winning bidder, Shunfeng, has signed a preliminary agreement to buy the assets at price equal to less than 30% of the stated liabilities of the Wuxi operation.  In this scenario, the banks will end up with essentially all of the equity that does not go to Shunfeng, and Suntech Holdings will suffer massive dilution of its equity interest in Wuxi Suntech if that equity interest is not cancelled outright.

Suntech Holding’s 79% interest in GSF is difficult to value, and the entity has been plagued by fraud and mismanagement.  According to a November 2012 filing by Suntech, GSF has 181 solar installations in Italy with a nominal capacity of 142MW.  Suntech Holdings has guaranteed €493 MM in loans to one of GSF’s operating subsidiaries, which guarantee was in turn thought to be collateralized by a pledge of €560MM German bunds controlled by the general partner of GSF.  According to the November 2012 filing, Suntech now believes the bunds may not have existed and it is the victim of fraud, the general partner of GSF has been removed and an Italian court has appointed receiver, from restructuring firm FTI Consulting, to manage the entity. 

Compounding these fraud issues, it has come to light that a substantial portion of GSF’s installations were not properly permitted, and at this point the Italian government has seized 47 sites representing almost 30% of the generating capacity of the partnership.  While there have been several acquisitions of PV solar farm assets in Italy this year at prices ranging from €2.5-3.0 per MW, even at the high end of the range, it does not appear that value of the GSF assets that have not been seized exceeds the debt incurred to build them.  Hence the value of Suntech Holding’s equity interest in GSF appears to be de minimis.

The remaining subsidiaries of Suntech Holdings had cash of unrestricted cash of $70MM and debt of $170MM as of August 31, 2012.  The company has disclosed no information about their profitability other than to report that its main European subsidiary has entered administration proceedings.  The Cayman Islands parent company had $3.3MM of unrestricted cash of as of August 31, 2012 and $541MM of convertible notes outstanding (on which the company defaulted in March 2013), a $50MM convertible note, and had guaranteed $66MM of loans and leases at subsidiaries, in addition to the GSF guarantees.

Given the debt claims against the subsidiary assets of Suntech Holdings, it is not clear that there will be much recovery for the bond holders of the parent beyond perhaps the funds paid to settle securities fraud suits against officers, directors and auditors.   For the equity of Suntech Holdings, standing behind $541 MM of defaulted debt at the parent level, given the low probability of any recovery from the subsidiary assets, the prospects of any equity value at the parent holding company level seem particularly remote.  I would urge you to consider the implications of this statement against the current $250MM market value of the company.  Current buyers of the stock are likely to be subjected to massive losses as the insolvency of the company is resolved.

Indeed it appears that the management of Suntech Holdings may have applied a similar calculus to the prospect of recovery value at the parent level, and determined that there is little if any value to salvage.  There is increasing evidence of operational incapacity of the holding company.  Consider the following observations:

  • the company’s three independent directors resigned in August saying that they could no longer serve effectively in their role.  Among the issues cited by the directors were:
    • Loss of critical talent and potential severe HR retention issues;
    • Failure to pay outside legal counsel;
    • Potential erosion of internal controls; and
    • Impairment of employees' ability to function effectively
  • reading between the lines of these comments by the independent directors, one senses that the company no longer has the liquidity to sustain its core functions.  In addition, the directors cited the “difficult prospects on completing consensual restructuring with convertible bondholders” as a reason for their departure
  • the company has not filed a form 6-K in connection with either the Chapter 7 filing or the summary judgment awarded to the bond holders in the last month, nor has one been filed about the preliminary agreement to sell the Wuxi assets
  • calls to the company’s North American headquarters in San Francisco, where its general counsel has his office, have been unanswered for the last two weeks, and voice mails left for every person in that office’s phone system directory have not been returned
  • the company made what appears to be a hasty exit from its offices at 71 Stephenson Street in San Francisco about three months ago, leaving behind desks in the reception area along with a large sign bearing the company’s logo - as depicted here:  and moved to what appear to be substantially smaller offices across the street
  • the last tweet on the company’s Twitter account was made in April as was the last post on its Facebook page
  • the management section of the company’s web site still lists the three independent directors who resigned in August as directors and still lists David King, who resigned in September, as the CEO
Considered in the aggregate, these items suggest a company struggling to sustain basic corporate functions and in a severely compromised liquidity situation.  The inability to reach a restructuring agreement on the Suntech Holdings debt despite a seven month grace period following default implies a very low level of likely recovery, and raises serious doubt as to whether the company’s equity has any value.

Given the company’s increasing inability to perform core corporate functions and its woefully inadequate disclosure of material corporate events (to say nothing of its failure to produce financial statements for six consecutive quarters), one has to ask whether such a company merits an NYSE listing.

Under section 802.01D of the NYSE Listed Company Manual, the Exchange has the discretion to delist securities which nominally meet its requirements for market value and revenue levels, but which are otherwise deemed unsuitable.  The NYSE Manual states:  

  • “The Exchange…may make an appraisal of, and determine on an individual basis, the suitability for continued listing of an issue in the light of all pertinent facts whenever it deems such action appropriate, even though a security meets or fails to meet any enumerated criteria. Other factors which may lead to a company's delisting include:
    • The failure of a company to make timely, adequate, and accurate disclosures of information to its shareholders and the investing public.
    • Failure to observe good accounting practices in reporting of earnings and financial position…
    • Unsatisfactory financial conditions and/or operating results.
    • Inability to meet current debt obligations or to adequately finance operations”
Given the company’s failure to disclose material corporate events, the increasing evidence of its inability to perform basic operating functions, and the departing independent directors concerns about the company’s financial and operating prospects, one has to ask whether investors are well served by the continued listing of this company on the NYSE.  There has been no current disclosure of financial results for over 18 months, a default at the holding company that has persisted for over 210 days, and an inability or unwillingness to report material legal actions initiated against the company.

The NYSE aims to be seen as the world’s leading securities exchange and states that “encouraging transparency in markets, setting high standards of integrity and governance…are exchange touchstones.”  It is hard to understand how the continued listing of Suntech is consistent with the NYSE’s high standards of corporate disclosure and investor protection.  I urge you to give serious consideration to the immediate delisting of Suntech."
When will Suntech finally give an accounting? What will it take?


Anonymous said...

Well said.

Will be interesting IF the NYSE actually does decide to delist how STP handles the situation.

Does it chose to appeal the decision (which can take six months for a hearing) or just go dark and trade on the pink sheets.

Anonymous said...

"Wuxi Guolian Development (Group) Co., Ltd. ("Guolian") to make an equity investment into the Company of not less than US$150,000,000 in cash in connection with supporting a comprehensive rehabilitation and restructuring of the financial and operational affairs of the Company."

When is the Chapter 7 hearing?

Seems odd....