LDK Solar struggles to survive, becomes desperate

Default is looming over the group, and only its home town is offering any support or assistance in this time of desperation.

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These days, LDK Solar Co Ltd., (ADR) (NYSE: LDK) is in a fight for survival. The company is faced with the short-term debt of some RMB 20B, and has no practical solutions to address it. Default is looming over the group, and only its home town is offering any support or assistance in this time of desperation.

LDK Solar has been depending heavily on the local city’s financial assistance to maintain its production lines, and by doing so, the municipal government of Xinyu city, in Jiangxi province, has become the lifeline to the company’s survival. By all accounts, LDK has become in part a municipality-owned enterprise. However, with an estimated total debt of RMB 28.9B against cash flow of only US $111M, the situation is indeed in dire straits, leaving the framework of survival in doubt.

While industry members know the market is still digesting an excessive supply of solar components and available resources, LDK Solar oddly enough is expanding its capacity by adding more facilities and new wafer production lines, even though the production rates of those plants are below 50% of their maximum output, and most of the employees are doing little or no labor at all.  Living in abstract conditions, LDK is broadcasting requirements to hire more employees in order to increase production, chanting official slogans to “meet the demand as the company continues to grow sales.”

It seems rather odd for LDK Solar to come up with more expansion plans whilst the market is in this condition of delicate balance, still threatened by overcapacity and low average selling prices.  Moreover, when new employees are coming to newly established facilities, long-term employees, with years of tenure, are owed their wages for months of delivered work.  Insiders disclosed that, on average, back pay owed per employee is worth three months of salary plus benefits. Certainly, unpaid wages are not a business priority. Instead, available monies are dedicated to recently opened production, an apparition of ongoing sustainability. The source of funding is also illusive, a mystery to journalists and analysts alike.

The entire industry has been besieged by consequences of the crash brought on by excessive expansion.  What kind of motive would suggest carrying on development at this time? It looks like that appearance of growth and “more sales” slogans are nothing more than a smokescreen to attract more funding. Unfortunately, this behavior got LDK in trouble before, when excessive spending resulted in overcapacity and mounting charges, bringing the company to its present circumstances.

Regrettably, city officials, who continue to infuse the company with funds regardless of the cost, have also immersed themselves in the campaign to save the reputation of Xinyu City, until recently regarded as the capital of China’s renewable energy. Although purely speculation, desire to preserve local pride is more of a practical reason for LDK Solar to stay afloat than any other.