China's Suntech Power Holdings STP.N, the world's biggest solar panel maker but facing an acute financing shortfall, saw its funding prospects darken further after it disclosed this week it had probably been defrauded.
The company was already struggling with fast-dropping solar panel prices, new U.S. import duties and the threat of trade barriers in Europe. It needs to raise over half a billion dollars by next March to refinance maturing debt, but after discovering that bonds used as collateral for new solar projects were apparently fake, that task has become much harder.
Foreign capital markets and white knight merger partners are likely to shun the woe-begotten company, analysts said, leaving its best hope in a bailout from Chinese government bodies that themselves may face financial or political constraints.
"The prospects for the company continue to get bleaker by the day," said Avian Securities analyst Mark Bachman.
"You're dealing with a communist country, and you could be looking at (this becoming) a state-run company," he said.
Whatever happens to Suntech could set the tone for sorting out the entire Chinese solar industry, the world's largest but buckling under excess supplies that have sent panel prices plummeting as much as 60 percent over the last year and a half.
Analysts doubt the Chinese government will allow Suntech to go under, given its global standing, but Beijing signalled last year it expected the industry to consolidate around a few strong players that could reliably help to feed its ravenous energy requirements with renewable power sources.
Chinese lenders and government bodies have in the past been happy to support even heavily indebted solar players, amid a general reluctance to allow credit defaults. But Suntech's case will be a test of industry experts' views that this forbearance may be about to end, as fears mount over how it distorts risk.
"The presumption is that everything is too big to fail, and it's a huge moral hazard," said Patrick Chovanec, economics professor at Tsinghua University in Beijing.
"Everyone always assumes Beijing will always step in ... This distorts perceptions of risk. It boils up a lot of confidence in an economy that wouldn't otherwise exist if people felt exposed to real economic risks."
The government also faces rising financial, political and diplomatic pressures over a possible bailout, which could add more problematic debt to overstretched local government or bank balance sheets, while irritating both local citizens and overseas trade partners who are increasingly sensitive to China's use of public money to prop up private companies.
Suntech said on Monday it was investigating whether its partner GSF Capital had lied about contributing 560 million euros ($690 million) in German bonds as collateral to secure financing for solar projects in Europe via a jointly owned fund.
Suntech shares tumbled more than 20 percent to an all-time low on Tuesday at $1.03 per share, a tiny fraction of their early 2008 peak at $90, and company analysts warned the decline may not be over.
Aaron Chew, analyst at Maxim Group, lowered his price target on Suntech shares to zero if the company cannot secure new financial help.
A spokesman for Suntech in China did not respond to a request for comment.
Suntech said it learned about the suspected fraud when it began trying to sell its 80 percent stake in the Global Solar Fund, which is 10 percent owned by GSF Capital Pte Ltd.
GSF Capital had pledged German bonds as collateral for a loan to the fund by China Development Bank, but Suntech, which guaranteed that loan, said documents verifying the bonds' existence now appear to have been fabricated.
GSF Capital is operated by Javier Romero, who formerly worked under contract selling Suntech panels in Spain. Efforts to reach Romero for comment have been unsuccessful.
The remaining 10 percent of the Global Solar Fund is owned by Suntech's founder, chairman and CEO, Zhengrong Shi.
Suntech needs the proceeds from the Global Solar Fund sale to cover $541 million in convertible bonds that come due in early 2013, although Suntech executives said on Monday they were seeking to secure new debt funding. The convertible bonds were trading at 45.8-50.7 cents on the dollar on Wednesday afternoon, indicating a deeply distressed company.
"We're about to reach the breaking point," said Maxim's Chew.
"I don't think bankruptcy actually happens per se, but there's got to be a major recapitalization," he said, with potentially a large, financially stable partner buying into the sector.
Chinese banks have eagerly lent to the solar industry, which globally accounts for less than 1 percent of generating capacity but is expected to grow as much as four-fold over the next five years. As European governments rolled back subsidies while panel production capacity ballooned, however, profit margins nearly vanished last year for solar manufacturers while renewable energy prices tumbled about 40 percent.
Many companies, including smaller Chinese players, have been put out of business, and industry experts have said Chinese lenders are unlikely to continue granting new loans that may never be repaid.
But another company that analysts said faced acute funding problems, LDK Solar LDK.N, was able to raise 500 million yuan ($78.5 million) last December by issuing three-year domestic medium-term notes (MTN) at 6.8 percent, cheaper than the one-year commercial paper funding rate of 7.59 percent it achieved on October 19, even though its access to offshore capital markets was cut off as doubts mounted.
LDK Solar's outstanding 1.2 billion yuan of synthetic yuan bonds due in February 2014 traded at 44.2-47.8 cents on the dollar at the time.
LDK was thrown another lifeline last month when the government of Xinyu city, in central China's Jiangxi province, said it would use taxpayer funds to repay LDK's loans.
Reports of this possibility were followed by criticism in the local media, and a statement on the city's moves was subsequently removed from the website of the Xinyu People's Congress.
A government official in the eastern Chinese city of Wuxi, where Suntech is based, told Reuters on Wednesday that Suntech had briefed the government about the situation but could not say what measures authorities might take. He added that the Wuxi government had a relatively detached relationship with companies operating in the city.
Suntech, which said in its annual filing in April that it was in violation of some of its bank loan covenants, has posted four quarters of losses, and Wall Street expects it to remain in the red through 2013.
($1 = 0.8120 euros, 6.3685 Chinese yuan)
(Additional reporting by Leonora Walet and; Kelvin Soh in Hong Kong, Kazunori Takada and Samuel Shen in Shanghai; Editing by Edmund Klamann)
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