Wednesday, August 28, 2013

Comment on Resignation of Suntech Directors ($STP)

A correspondent posted this in the comments section:

Two of the three outgoing Directors were CPAs; their resignation concerns make clear that they were stonewalled when ascertaining if Suntech is solvent.

The remaining Directors seem to want to roll the dice: if they can sign off on at least one fire sale, then a restructuring and turnaround might be possible in their view.

It is likely that the new Chairman (who was elected by bondholders) is attempting to sell assets in order to get PRC banks to sponsor a debt for equity conversion through an exchange offering.

Even if Suntech were to retain banks, lawyers, etc, a number of roadblocks might prevent an exchange offer from ever happening, in particular:
1. Suntech may need to complete a shareholder vote to authorize adequate unissued shares for an exchange offer can be made
2. Creditors may not trust managers (who ran Suntech into the ground) and may prefer an in-court liquidation
3. Out-of-court deals take time to negotiate and may take even longer to complete when accompanied by liquidity issues (such as the current credit crunch in China that is hurting Suntech's PRC lenders), as exchange offers rarely bring in additional capital.
4. The vast majority (typically over 90%) of bondholders would need to be in agreement for an exchange offer to be carried out since separate settlements would also need to be reached between dissenters and Suntech.
5. The lack of concentration of ownership among the PRC banks and offshore bondholders, in addition to the US federal lawsuits underway in NY make it even more difficult for Suntech to reach multi-party settlements while also carrying out multi-party negotiations for an exchange offer concurrently.
6. Provisions in Suntech's many debt instruments, ADR facilities, and more legal issues may prevent an exchange offer from being carried out (for example, the repercussions of a change of control).
7. Suntech's corporate structure also will likely present complex tax liabilities which could prevent an exchange offer from being carried out, in particular since debt income cancellations could result in burdensome tax consequences.
8. Last but not least, the new board needs to have a clear road map on how Suntech can exit bankruptcy in the PRC, restructure its debt, and return to profitability in order to make an debt for equity exchange offer attractive to creditors.

A number of other factors may also prevent Suntech from having the capital necessary to carry out an exchange offer, such as:
I) The failure of Wuxi Suntech creditors to extend bankruptcy on or by September 20 as well as a forced shotgun merger with a state owned enterprise thereafter;
II) The failure of Suntech Holdings to file restated 2010-2012 financials (accounting for the $600M GSF loss) and a 2012 annual report, as well as updates on the company's overall debt situation;
III) If Suntech were forced into Caymen involuntary insolvency proceedings by bondholders who could establish a lien via a judgement ruling in the US; and
V) If Suntech's line of credit no longer revolves and it becomes insolvent.

Cayman law is very creditor friendly and it would take a very brave board to continue operating an insolvent Cayman holding company.

Cayman insolvency proceeding are not as rescue oriented as US Chapter 11 or UK administration, but rather focus on arranging an orderly liquidation.

It is very unlikely that Suntech would be able to negotiate a pre-pack with its many creditors or carry one out under Cayman law.

Consequently, if an exchange offer fails, then Suntech's new board will need to direct 100% of their attention to pre-negotiating asset sales and commencing with voluntary insolvency.
Very interesting.


Anonymous said...

So it looks like this will continue to drag on past Friday?

Anonymous said...

Oh, not necessarily.

They are about to lose the first bondholder lawsuit. Unless they want to start forking over tax returns and bank statements in post-judgement discovery they are going to need to file bankruptcy.

Steve said...

The Company intends to immediately commence preparations for implementing a recapitalization plan that contemplates a scheme of arrangement as part of a holistic restructuring of the Suntech Group.

CP said...

Yes! I'm about to post it.

Scheme of arrangement is the Cayman insolvency proceeding.

CP said...

"The Cayman Islands has long been regarded as, and continues to be, a creditor-friendly jurisdiction."