LDK Solar (NYSE: LDK) used to be ranked number one for its quarterly revenue, but today, the company remains number one in the industry for the amount of its debt. In the most recent two quarters, the company has lost a combined $752M, the largest 6-month loss ever posted by the Chinese solar company.

Until last month, “too big to fail” and “government will bail LDK out” dominated opinions on the company. Enjoying a star status and being a local pride in the past, LDK and the local government (Xinyu, Jiangxi Province) had always strong ties. The city has supported the company wholeheartedly, through various policies and helping it with loans. The backing from the local government also enabled LDK to obtain loans from the number of banks, such as CMBC, CCB, ABChina, CDB, ExIm-Bank, SPDB, BankComm, CMB-China, CEB-Bank etc. The total debt accrued by LDK over the years stood at $3.4B at the end of Q1, 2012. Being a big employer and a tax payer, LDK was very important to the local economy. Therefore, Jiangxi Province and Xinyu City have helped LDK wade through tough times such as the financial crisis in 2008. Typically, the government lent LDK money by using part of LDK’s assets as a collateral in times of emergency. When things got better, LDK would obtain financing elsewhere and pay back the government.

The most recent news about LDK is that the local government gave LDK 500M Yuan from its own budget, once again using certain LDK assets as collateral. In China, typically help from government equals to arrangement of a loan from a financial institution like a bank. City taking collateral on own books indicates that LDK is in real dire situation as no bank is willing to get involved in the bail, this time. While the local government can influence local banks, a local bank is actually an independent entity and typically a part of a national banking system. So local banks clearly saw the risks and refused to throw more money in.

It is expected that LDK is going to lose more than $100M each quarter in the foreseeable future. The situation is likely to persist into 2013, or even 2014. At the same time, LDK has more than $2.2B short-term debt due this year. The burden is so heavy that local and provincial governments are feeling the heat. Jiangxi is a relatively poor province and it has its own share of problems, beside LDK. For one, there is a big nuclear power plant put on hold after last year’s Japanese nuclear disaster. The government has already spent a lot on pre-construction phase. The situation is compounded by cooling of the Chinese economy, which already caused budget problems for few local governments. Assumption that the local or the provincial government will sustain LDK infinitely simply has no place in how things operate in China.

In the past few days, there were articles popping up in the media about the possibility of LDK’s bankruptcy. Some analysts said there is no reason to believe that LDK is immune to bankruptcy as LDK is unable to pay back its loans. Since there are so many banks involved, it will be extremely difficult for LDK to negotiate terms to revolve all of its debts. Of course, the problem is not only existing debt, LDK’s continuing operational loss means it needs new loans to sustain its operational deficiency. Without a positive cash flow, since the amount of deprecation hardly covers interest payments, money needs to be continuously borrowed. It is said the company has already exhausted the willingness of vendors to accept long turnaround on payments. Now, in order to get the raw material, cash payments are being demanded. Essentially, LDK’s  ability to enter new markets and or to continue with new customers have been severely compromised. Already selling at spot- low prices in Q1, any sales may be done in liquation type environment or just to fulfill long-term contracts, only ones, which are still in place. The company has $218M in short-term and $112M long-term advancements from customers under liabilities. Those monies are already in the cash account, yet services have not been rendered. LDK would be unable to return any deposits anyway with $135M in cash, but to garnish new ones is probably impossible, thus no cash flow from this source. In addition to interest bearing debt, LDK has $2B in trade accounts and payables, which needs to be paid. The payable cycle is already well over 100 days but there is no money to cover. LDK looks like it is in the financial abyss having no other way, but down.

Trying to save itself, LDK is also said to be in talks with several national companies about the possibility of a merger. While this may be the intent of the management, any company which would be willing to take on LDK, would simply acquire poor solar division with immediate costs just to keep it operational.  Taking over the $3.4B in interest bearing liabilities would add $250M into cost every year, without paying a dime of the principal. In this situation merger seems very unlikely.  

All in all, the 500M Yuan from local government may be able to buy few more months for LDK, but the mounting losses will make it impossible for the local government to keep the company afloat much longer. In this authors’ opinion, LDK’s bankruptcy is inevitable and can happen as early as the beginning of 2013.