Suntech Financials Get Worse; Trina’s Q2 Guidance Sees 20% Drop

So far, the investigations have revealed that none of the company’s own employees are involved in the scam.

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Suntech Power Holdings Co., Ltd. (NYSE: STP) has revealed that it might be a “victim” of a half-billion-dollar fraud. The company was pledged German government bonds worth approximately $686 million in a financial deal as collateral by one of its partners. It has now found out that the collateral was bogus. Suntech’s CEO Zhengrong Shi has said in a conference call earlier today, "We now suspect that the German government bonds may not have existed and Suntech may have been a victim of fraud."

The deal originated from Global Solar Fund and involved an asset management firm, GSF Capital Pte. Ltd. Suntech has 80% stake in Global Solar Fund, while the business’s chief executive Shi and GSF Capital Pte (as third-party investor) own 10% each. The company has found out that the documents related to the collateral submitted by GSF Capital might not be real. Global Solar Fund was set up by the company to provide financing to other solar firms. Suntech had recently decided to sell assets of Global Solar Fund when it discovered that the German bonds of $686M (560mn Euros) that were pledged by GSF Capital, in May 2010, as security against a financial deal, “may not have existed.”

So far, the investigations have revealed that none of the company’s own employees are involved in the scam. Shi was quoted as saying, "There is no indication that management had any involvement, and we are vigorously pursuing all avenues to resolve this matter."

Following the news, Suntech’s shares fell initially by a record 15% to $1.33 from $1.57. The business has a $541 million bond obligation coming up next year, which means that it will have to borrow in the coming months to refinance its debt. Suntech’s executives have announced in the conference that they are pondering over their options to either issue bonds in Chinese markets or secure a new line of credit to refinance their obligations. The company already has a high debt-to-capital ratio.

Refinancing may further hit profits margins negatively as panel prices around the world continue to fall. Raymond James analyst Pavel Molchanov thinks that the company won’t be able to touch profits until the first quarter of 2013. Furthermore, he believes that the business “has by far the most strained balance sheet among Chinese tier 1 module producers: 52% net debt-to-cap as of June, as compared to Trina’s 7% and Yingli’s 22%.” Suntech has further revealed that it may delay the issuance of its 2^nd quarter report as Raymond James suspects that the company will have to make some “significant adjustments.”

In the meantime, Trina Solar (NYSE: TSL) has revised down its shipment estimates for Q2 from 500MW - 520MW to 390MW - 420MW, representing a massive decrease of 20%. Furthermore, gross margins will be within 7% to 9%, as opposed to the 10% announced earlier. Jifan Gao, the CEO, has blamed “US market uncertainty” due to “tariff” and unfavorable “timing of several large projects in China” for the loss. The company added potential countervailing and anti-dumping duties and a non-cash inventory write-down in the range of $26 to $28M. It appears that some of the customers had not paid Trina for the deliveries, and while the company is negotiating for the payment, the amount of $45 to $48M will be added to doubtful accounts. Another is a $23M loss in foreign currency exchange already net adjusted for fair value changes in derivative instruments. The company warned of the possibility of adjusting down yearly guidance of 2 to 2.1GW in shipments.