Saturday, May 4, 2013

WSJ: "The Man at the Center of Solar-Panel Maker Suntech's Fall" ($STP)

An excellent article in today's WSJ, "The Man at the Center of Solar-Panel Maker Suntech's Fall",

Through what analysts and regulators describe as a complicated set of transactions, Mr. Shi helped finance an investment vehicle known as Global Solar Fund that created demand for his solar panels. The venture, he and other Suntech officials later said in a lawsuit over suspected fraud in the fund, was deliberately structured to keep hefty debts off Suntech's books.

"Suntech didn't want to have control over management of the proposed fund," Mr. Shi said in an affidavit filed last year in a Singapore court. "If Suntech had control, it would have been obliged to consolidate the financial statements of the proposed fund with its own."

But last year the venture began to unravel, preventing Wuxi, China-based Suntech from selling the vehicle just as a $541 million bond payment was coming due. Suntech is now in Chinese bankruptcy court, and Mr. Shi isn't allowed to leave China without court approval, as is customary with non-Chinese executives involved in bankruptcy proceedings, according to people familiar with the matter.

Suntech's collapse was widely attributed by analysts and the company itself to a world-wide plunge in solar-panel prices. But interviews, court documents and company filings suggest China's flagship champion for renewable energy was also hit by what analysts say were poor management decisions and questionable corporate governance practices. At the center of the transactions was Mr. Shi, whose decisions they said raised eyebrows among investors and analysts.
Read the whole thing.

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 really more, "are all the subsidiaries solvent?".

So we have this holding company where it is hard to see where any value could come from. Yet, 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 $110 million!

In other words, the bondholders think that the holding company is worth $146 million and the equity investors think it is worth $651 million. A difference of half a billion dollars!

Sooner or later, that difference will be reconciled.


Walter said...

The presentation says STP guaranteed $66m of bank loans and financial leases at subsidiaries. But then another item says "Downstream guarantees of bank loans" but not how much. Any idea what the difference between these two things are, and how much the second item is?

Walter said...
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Walter said...
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CP said...

It's "downstream guarantees of domestic bank debt". I assume that means all of the Chinese bank loans to the subsidiaries but they aren't precise on describing this.

It's always possible that the Chinese banks wouldn't enforce those guarantees I suppose.

Either way, I don't see any reason to be optimistic about the GSF recovery. Remember, it's not like they weren't trying to sell it before the bonds matured. It's possible there's just no equity in it at all.

Walter said...

It just seems surprising to me that all the bond traders are overlooking STP guaranteeing over a billion dollars of bank loans. Bonds still trade so some people think they can make money buying it at 25, and I believe the majority of bond traders care about fundamentals, unlike stock traders.

I'm guessing bankruptcy would complicate the GSF sale and that's why bondholders have been willing to defer it. Can't think of any other reason, surely they can't expect to get anything from Wuxi Suntech.

CP said...

Bonds trade in piddling little amounts. I doubt you could do a $5mm order at this price.

Also bankruptcy tends to make asset sales much simpler and easier.

Walter said...

It's true that volume has dried up recently, but it was a lot higher a few weeks ago, when they were still trading around 30. Do you have any theories on why bondholders are willing to defer it again? Thanks for your input as always.