Spotlight on solar panel maker Suntech in test for China

August 6, 2013 6:06 pm

Spotlight on solar panel maker in test for China

By Henny Sender

Close watch on case amid competing priorities

Suntech Power Holdings was once the biggest solar panel maker in the world by production volume, its founder Shi Zhengrong was the richest man in China and the offshore parent company was listed in New York with a market capitalisation of $16bn. Then in March, Wuxi Suntech, its principal subsidiary, filed for bankruptcy under China’s new revitalisation law. Chinese banks are owed about $2.3bn by the mainland entity according to filings as of year-end 2011. Creditors to the offshore parent, a group with claims of almost $600m that includes several hedge funds as well as the IFC arm of the World Bank, are also attempting to recover their loans. The offshore parent has not filed for bankruptcy and is still operating.The case is being watched closely as China tries to reconcile its competing priorities. It isn’t clear what Suntech’s ultimate fate will be – whether the Chinese units will be bailed out in the name of job creation and social stability; or made prey for a healthy competitor as part of a much needed rationalisation of the solar industry; or even left to fend for itself. The outcome will provide clues to the choices Beijing makes at this inflection point in its economic growth and development model – as well as clues about whether local governments resist or adhere to edicts from the capital.

Since March, there have been a number of surprises. Until then, creditors assumed that China Inc would bail out the ailing company “in the mysterious Chinese way,” says one creditor. That didn’t happen. In addition, few people had expected the big Chinese banks to be the ones that ultimately pulled the plug on Wuxi Suntech, even though that is likely to trigger big writedowns for them.

The fact that the banks were the ones to cease supporting Suntech suggests Beijing is trying to shift away from its previous growth model that relied on allocating cheap capital to chosen sectors. This approach treated the banks as instruments of state policy rather than institutions that allocated capital to those who can use it most efficiently and profitably.

Suntech’s plight is the result of chronic over-investment in sectors that the government considers its priority. “Demand for our products depends on government subsidies,” its financial statements baldly declare. Those official subsidies include cheap capital from banks including China Development Bank, a policy lender, and the listed, more commercial Bank of China, as well as preferential taxes, according to Suntech regulatory filings. By finally saying no, the banks are embarking on a new era.

The solar business, like the semiconductor chip business, is notoriously volatile. In 2010, the company’s net income was $238m, but the following year it produced a net loss of more than $1bn. In addition, Suntech is the victim of considerable mismanagement. It set up investment arms that suffered big losses. There were also related party transactions as it did business with a unit Mr Shi controlled, according to filings with the Securities & Exchange Commission.

One reason that the outcome isn’t yet clear is because the local governments have priorities that differ considerably from those of Beijing. The local government of Wuxi, in Jiangsu province near Shanghai, which supported Suntech from the start, would like to see it saved – not least because of the thousands of jobs it and its 400 suppliers provide.

Moreover, Wuxi appears to be the first locality in China to establish its own asset management company. This unit could eventually be a source of funds for a future recapitalisation of Suntech.

Meanwhile, Wuxi Guolien Development Group, an investment company with close links to the Wuxi city government is leading talks on restructuring the debt on the Chinese side. It recently appointed one of its own, Zhou Weiping, as a new director of the company in a sign creditors and advisers say they regard as hopeful, as it makes a rescue deal more likely.

In many past restructurings, the outcome has been seen as arbitrary, a reflection of China’s lack of experience in debt renegotiations, which stems from a system where bank loans are more akin to state grants than commercial debts that are meant to be repaid. This time offshore creditors, who have promised forbearance until August 30, hope the outcome will be more favourable, at least partly because Suntech has so many valuable offshore assets that could be seized.

But the dynamic in a China that is trying to change may be far more unpredictable than in the past where Chinese priorities and the heavy hand of the state were easier to anticipate.