Some Bullish Solar Links

• As the Edison Electric Institute notes, the proportion of regions where solar at home will be cheaper than electricity purchased from the grid could grow to as much as one third of the nation as soon as 2017. Nowhere is that more true than the desert Southwest of the U.S., in states like Arizona. In that future of cheap solar the home would be a self-sufficient energy fortress, and perhaps self-driving electric cars would plug in there, to recharge from sunshine. Batteries or even technologies that transform newly abundant natural gas to electricity inside the home could serve as backup for cloudy days. In fact, solar systems paired with batteries or fuel cells could become cost-effective in states besides Hawaii (where it is already so) by the 2020s, according to a new analysis from energy think tank the Rocky Mountain Institute, and partners. "How shockingly stupid is it to build a 21st-century electricity system based on a system of 130 million wooden poles?" asked NRG's David Crane at the ARPA–E summit on February 25. "The day is coming, within a generation, where the grid is, at best, an antiquated backup system." [March 2014]
• This is what we are facing today in Solar – the Dr. Evil ultimatum. The cost to get Solar to coal parity is going to be laughably tiny. The cost sounds like a lot of money to old people, or to people who haven’t thought it through, or to people who do not know how large world GDP is today and how much we spend on energy already. But the cost is tiny, and China laughed when they found out the cost. [June 2014]
• The highly conservative International Energy Agency predicts the cost of solar energy will fall to around 4c/kWh in coming decades as the sun becomes the dominant source of power generation across the world. As we reported on Monday, the IEA now expects solar to become the biggest single source of energy by 2050 and has now doubled its forecast capacity for solar PV. Rooftop solar, it says, will now account for one half of the world’s solar PV installations, because as a distributed energy source the technology is “unbeatable”. [October 2014]

China Sunergy?

This writeup about China Sunergy was left in the comments section of a post this week:

You all should evaluate buying China Sunergy put options.

CSUN is a smaller, younger Suntech which is in a similar situation: $458 million notes payable and $132 million long-term debt against $500 million of assets, of which $31 million is cash as of the most recent quarter.

CSUN revenue halved as a result of EU tariffs and it has operated at a loss in all but one year since it's NASDAQ listing in 2007.

Given declining margins and production capability utilization over the past few years, management decided it would be a best to (drum roll) issue debt to build a new plant in Turkey.

The CSUN strategy is simply to reduce the cost of producing solar panels and roll-forward short term bank debt by drawing down and re-extending credit facilities.

Like many other Chinese solar manufacturers, there are many reasons as to why CSUN will now get "a cold shoulder from banks in the form of smaller and costlier loans:".

The only reason banks extended fully utilized credit facilities is because they were guaranteed (in 2011) by assets of the chairman, two of his asset management companies, and the Bank of Nanjing, a city located in the same debt-ridden providence as Wuxi.

CSUN has been operating with a significant working capital deficit and desperately needs cash, as it today announced that it would transfer an idle plant to the chairman's privately-owned competitor, CEEG, for $13 million cash and $25 million of debt relief.

Additionally, CSUN has stated that it is "in need of additional funding to sustain our business as a going concern" numerous times each year for the past few years.

You can find a liquidity plan in the last (2012) annual report for what will happen when the company cannot roll-forward it's bank debt or breaches long-term debt covenants.

The 2013 annual is due on 4/4 next week so we will get an update on the financial position of the company.

The bank borrowings have 6-12 month terms that mature at various times throughout the year, while the short-term credit facilities are subject to annual renewal.

Given the outstanding debt, the issuance of equity is really the only card left for CSUN aside from undergoing a restructuring.

Therefore, the June and September puts may be better options than the shorter-term ones, but all will rise in value due to the severe working capital shortfall and CSUN's debt burdens.

I haven't looked at it yet, but in case anyone wants another China short.

Solar Dead Cat Bounce Almost Over?

A correspondent writes in,

"Some of these solar stocks are starting to look shaky. I wonder if the STP and LDK bond situations are making some of the bulls think twice? Look at YGE, TSL, SOL; look like accidents waiting to happen from a technical perspective."

Good call. This has been a totally unfounded rally since April.

Do you really want to invest in an industry with excess capacity, in a country where paper ownership doesn't mean anything?

"Bankrupt solar panel firm took stimulus money, left a toxic mess" (Not Suntech)

"The Abound Solar plant, which got $400 million in federal loan guarantees in 2010, when the Obama administration sought to use stimulus funds to promote green energy, filed for bankruptcy two years later. Now its Longmont, Colo., facility sits unoccupied, its 37,000 square feet littered with hazardous waste, broken glass and contaminated water."

"LDK Solar says will miss debt payment; shares down" ($LDK)

"It will be the second time this year that LDK has failed to make a debt payment. The company partially defaulted on a $24 million bond in April, citing a temporary cash flow shortage."

What, no bailout?

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.

"Solarworld Bonds Plunge With Shares on Push for Debt Revamp" ($SWV)

From a news article out today,

"Solarworld slid the most in 13 years in Frankfurt and its bonds due 2017 dropped as much as 43 percent after the company said it needs to make 'serious adjustments' to its debt structure. Germany’s biggest maker of solar panels said last night that external financial advisers suggested action to restructure its debt after a review of earnings prospects."

Stock is down 30 percent. Apparently, the 2017 bonds are now trading at 19 cents, meaning that the stock (which still has a >$100mm market cap) has probably under-reacted. I don't know why the existing equity thinks that it is going to get that much value.

"China's GCL-Poly Warns Of Loss Amid 'Vicious' Solar Industry Competition"

From Forbes:

"GCL-Poly Energy Holdings, one of the world’s largest suppliers of polysilicon and silicon wafers, warned investors on Friday that it expected to post a 'substantial' loss for 2012."

Suntech Power Reports Results and JinkoSolar Gets Bailout ($STP)

Suntech Power finally commented on quarterly earnings,

"already under pressure from the collapse in the price of its products, said an internal probe concluded the company was defrauded by a partner in a solar development fund [...] Suntech will reduce its 2010 net income by between $60 million and $80 million [...] The company also said revenue fell 18 percent from the second to third quarters because subsidies were cut in Europe, a top solar market. Shipments of photovoltaic solar panels are expected to be lower than planned. Suntech is also weighing alternatives to cover a $541 million convertible bond due in 2013."

Oddly, this "earnings release" does not yet include a balance sheet or an income statement. And there are no details about how the company plans to repay the 2013 notes. Meanwhile, another Chinese solar firm received a government bailout,

"JinkoSolar Holding, a leading global solar power product manufacturer, today announced that JinkoSolar (Switzerland) AG, its Swiss subsidiary, has entered into a strategic cooperation agreement with the Guangdong Branch of China Development Bank, pursuant to which CDB intends to provide financing cooperation to JinkoSolar (Switzerland) AG of an aggregate amount up to US$ 1 billion over a five-year period. The final conditions, terms and amount of the financing under the Strategic Cooperation Agreement is subject to the parties' further approval and will be set out in separate agreements."

Key word of course is "up to", but this is rightly considered bullish for Jinko. What's funny is that one firm receiving a bailout is slightly bearish for the remaining firms, because their odds of receiving one of the limited number of bailouts presumably decreases, since the Chinese government is presumably picking only a handful of 'winners',

"'The agreement is part of the Chinese government’s effort to provide support for selected manufacturers as it picks the companies most likely to survive the current slump,' said JinkoSolar Chairman Li Xiande. 'We believe they chose Jinko because we have a healthy balance sheet and strong business development management in the downstream sector [...]The survivors will be the players who have the advantage in terms of technology, cost and branding. The biggest may not survive.'"

So, the big question is does Suntech look like one of the survivors? From the murmurings behind the scenes, it doesn't sound like the Chinese government is very impressed with Suntech management.

WSJ from 2011: "Fund Manager Bets On Busted Chinese Convertibles"

I wonder how betting on Chinese convertible debt has gone over the past year?

He noted the risk of investing in Chinese assets is high as the country's bankruptcy process is still largely untested and investors run a chance of having entire holdings being wiped out.

But, he added, there are "legitimate companies" worth betting on. And, on a broader level, Kao said some sectors are more strategically significant to China.

"The solar space is deemed 'too big to fail' from Beijing's perspective," he said, noting the Chinese government's commitment to develop alternative energy sources and decrease the nation's reliance on fossil fuel.

Recent developments at Suntech Power have not seemed to support the idea that Chinese solar firms are necessarily too big to fail or will be bailed out.

"LDK unveils more job cuts, slashes revenue forecast" ($LDK $STP)

"China-based LDK Solar slashed its revenue forecast for the year and disclosed that it had laid off more than 2,500 employees in the third quarter as high U.S. import duties and weak prices dent shipments of solar cells and panels."

Waiting for the Suntech investors to figure this out.

More Solar Bad News

Silicon wafer manufacturer Sumco exiting solar wafer market and firing 1300 workers:

"Citing 'structural' overcapacity, 'significant price declines' and a fall in demand of crystalline silicon wafers, Sumco has decided to completely exit the market."

Here is their handy chart of the collapse in silicon wafer prices. That is from this presentation on their reorganization plan.

Meanwhile, here is a better description of what the end of the ear 2011 was like for photovoltaic solar firms,

"[M]any were surprised at just how low prices went. Crystalline prices at the end of 2011 were a massive 45% lower than they had been at the end of 2010, exceeding even the most aggressive forecast for price reductions."

Another report said that as of the end of December, half of Chinese solar firms had ceased production entirely.

A Worthless Stock Buyer, Observed in the Wild!

This is from an article on "thestreet.com" called "5 Stocks Under $10 Set to Soar". Before we start, raise your hand if you think that the stocks are expected to soar for fundamental reasons. If you said yes, go back to square one.

"Traders savvy enough to follow the low-priced names and trade them with discipline and sound risk management are banking ridiculous coin on a regular basis. [...] I definitely love to trade stocks that are priced below $10. I like to view them as a trading vehicle with lots of volatility and lots of upside when the trade is timed right."

Note that his emphasis was on "trade" - and on not getting caught holding the bag. He mentions three solar stocks (!), including Energy Conversion Devices.

Anyway, his comment about volatility is funny, because it is precisely the hypothesized reason for the worthless stock inefficiency. As Kumar (who calls them "lottery-type stocks") wrote,

"high idiosyncratic volatility is important in the sense that it may lead investors to amplify their perception about skewness. This would be especially true if they adopt an asymmetric weighting scheme and assign a larger weight to upside volatility and ignore or assign lower weight to downside volatility."

So... the "set to soar" article is another data point in support of our worthless stock theory.

STR Holdings Comments on Fourth Quarter 2011 Results

From the press release:

STR Holdings announced that revenue is projected to approximate $36.5 million for the fourth quarter of 2011... below the Company’s guidance of $44 to $48 million.

“Although the solar industry appears to have temporarily benefitted from strong German installations in December, we believe that most of this demand was satisfied from existing module inventory,” said Barry A. Morris, Executive Vice President and Chief Financial Officer.

Bearish.

Solar Earnings Roundup

• DuPont's quarterly revenue missed Wall Street expectations as its customers bought fewer solar-panel materials and digital television parts, offsetting strong demand for chemicals used in agriculture. (Jan 24)
• The glut of photovoltaic panels that wiped $30 billion from solar stocks last year is likely to expand in 2012, forcing manufacturers out of the industry... (Feb 1)
• SMA Solar, Germany's biggest solar company, said it was unable to give an outlook for the ongoing financial year, blaming regulatory changes in key markets and the euro zone debt crisis. (Jan 13)
• STR Holdings announced that revenue is projected to approximate $36.5 million for the fourth quarter of 2011... below the Company’s guidance of $44 to $48 million. (Feb 3)
• Due to uncertainty on feed-in-tariffs and other legislation, as well as the global macroeconomic uncertainty affecting end market demand in both SBUs, Power-One is not providing full-year guidance for 2012. (Feb 2) 
• Prices for solar panels dropped 47 percent last year to $0.94 a watt after the 10 largest makers including China’s Suntech Power Holdings, the biggest, and No. 2-ranked LDK Solar, together doubled production capacity in 2010... The companies forecast a decline in shipments for the fourth quarter of last year. (Jan 5)

"Q-Cells bondholders agree to debt restructuring"

"Ailing solar company Q-Cells said it agreed a deal in principle with major bondholders to restructure its three convertible bonds... 'Following this equitization, the 2012, 2014 and 2015 bondholders shall collectively hold at least 95 percent of the issued share capital of Q-Cells SE,' the company said..."

This is the natural thing for a distressed solar company to do. The bondholders take ownership.

Distressed Names

Taking a look at the distressed public universe. Some names and bond pricing contexts.

2012s
AMR ~25
FTWR ~15

2013s
GMXR ~60
STP ~65
LDK ~60
CSUN ~45
ENER ~38
EK ~28

2014s
USU ~60

2015s
YRCW ~43
ATPG ~70

2016s
AONE ~50 - this is another ENERish looking one with cash

Guess what? There are a ton of distressed PV solar names!

German Solar Firm Q-Cells to Restructure ($QCEG)

From a press release by Q-Cells today:

Q-Cells SE plans a restructuring of its financial liabilities in two steps. After intensive negotiations with different creditor groups, the Company initially aims to come to an agreement with the holders of the convertible bond due at the end of February 2012. This agreement will provide among others for a partial repayment of the outstanding bond volume in tranches over a period of time. In a second step, and in due course, the convertible bonds due in 2014 and 2015 shall be restructured via a debt-to-equity swap.

"Partial repayment in tranches" would mean that those bondholders are getting a haircut, and getting paid in new debt with later maturities. And it sounds like the 2014 and 2015 bonds are getting only shares. The company has yet to publicly announce the details, but you would expect the shareholders to be basically wiped out in this restructuring.

In the same press release, the company mentions that it does not expect to achieve operating profit until 2014. In my experience, when someone projects that something will happen more than six months away, it either means never or "I don't know".

They will apparently be cutting manufacturing operations in Germany by 50% (more excess capacity in PV solar!).

Anyway, this is all good news for the short solar trade. Tons of excess capacity, and other firms that will emerge more competitive after restructuring. 

Undifferentiated Trading in Solar Stocks

This is a chart of Evergreen Solar common and Energy Conversion common over the past month.

Notice the very high correlation. Basically, every highly shorted stock spiked sharply last week (which of course meant the solar stocks did too).

It's funny because there is very little uncertainty about the value of ESLR stock: the company is in bankruptcy, the secured debt is taking a big haircut, the unsecured debt is getting virtually nothing (trading at less than a cent). Clearly, there is no good news or reason to buy the ESLR shares.

That allows us to test the hypothesis that there was no information content in the rally; just undifferentiated buying of highly shorted stocks.

What we see in the ESLR/ENER chart is consistent with that hypothesis.

Nonsensical

I'll follow up more on how bizarre trading has been this week, but just a quick note that the small cap solar firms (that are going extinct) were up massively today while natural gas and NG producers were down.

Solar cannot compete with electricity from natural gas at these prices. Falling electricity cost (which is set at the margin by natural gas prices) is ultra bearish for PV solar demand.

The only logical explanation is that there is very large short interest in the solar companies because they are rightly perceived as failures. And today was a gigantic short squeeze.