Chinese Banks Support Large Solar Enterprises in the Contest for Survival

While many in China are whispering in hopes that LDK may go under to make room for others, local governments are having a different idea

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Continued losses of several quarters have stressed many Chinese PV companies. The prospects are dim with bleeding projected at least till early 2013. Some speculate that every quarter will be red for most companies even further into to a next year. All enterprises are working hard to raise capital in order to survive, but not all seem to have the support to do so.

This year, we have seen a slew of companies doing various deals to keep liquidity. The local banks at Jiangsu and Zhejiang provinces are said to have tightened their lending requirements so it is hard for smaller companies to continue borrowing there. As a note, most of small to mid-sized PV companies are located in those two provinces. Large companies however appear to be outside of those restrictions.

For US-listed Chinese companies, given the low stock price, raising capital through secondary stock offering or convertible bonds does not make much sense; instead, they seem to find a support in the local governments and in some cases, state enterprises. Particularly ones seen as well-managed, example of it is Canadian Solar (NASDAQ: CSIQ), have been looked at with the most interest.

Currently the “the talk of the town” on the subject is LDK Solar (NYSE: LDK), a company, which is certainly in the financial trouble. Over the years, it has racked up more than $3B dollar debt, the most among all the PV companies globally, not just in China. Recently LDK announced a big layoff and the plant closure after a dismal Q4. While many in China are whispering in hopes that LDK may go under to make room for others, local governments are having a different idea. Earlier this month the company was offered a loan of 2B RMB. The loan is said to be guaranteed by provincial government was made possible by Jiangxi provincial banks to propped LDK’s operations. Also, the local government picked up part of the tab for layoff expenses.

Yingli Green Energy (NYSE: YGE) is shown to have 2.3 billon dollars of debt in its 2012-Q1 filings, the second most among the US- listed. On May 3^rd, YGE issued a variety of notes with China Development Bank (CDB) as the underwriter, worth 1.5B RMB. Since early 2011, YGE has obtained loans of north of 4B Yuan from various banks. Jinglong Group, parent company of JA Solar (NASDAQ: JASO), was given a total of 1.1B RMB in 2011 and 2012, with 450M RMB in the first quarter of 2012. Jinko Solar (NYSE: JKS) sold 300M RMB 1-year bond in April. Suntech Power (NYSE: STP), the largest module company in 2011, has not done any deals this year. Its debt and cash remained largely unchanged since late 2011 despite heavy losses. Industry watchers said STP has relied heavily on paying suppliers late to maintain its liquidity, another practical way of saving cash increasingly seen in balance sheets of solar companies.

Compared to the large US- listed companies, which have relatively easy to get financing in China, some small to mid-sized independent PV companies are getting more creative. Hareon Solar, a company listed on Shanghai Exchange, recently made a “sale-lease-back” deal with banks to obtain about 300M Yuan by selling its wafer production line to a leasing company. For PV companies which are part of a business group, their losses may be covered by the “parent” and borrowing can be obtained in the same fashion.

So far, China’s self-cleansing in the solar sector is going very slow. Despite heavy losses, many companies managed to obtain necessary liquidity to keep operations going. Although quite few smaller, private companies have shut down, the overall lost capacity is moderately small. This year, the total installation in China is projected to be between 5 to 6 GW. Most of these installations will occur in the second half of the year and many small to mid-sized companies are counting on domestic demand to survive 2012 without any potential for income and by living on credit.