Crippling Debts Deepen LDK Crisis

Company pushed even closer to bankruptcy as capital drains out

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A series of loan defaults and increasing difficulties with finding new funds from investors, lenders and the government are pushing LDK Solar Co., Ltd (ADR) (NYSE:LDK) to the brink of bankruptcy. This comes against the backdrop of bleak market prospects for the Chinese solar PV industry that has seen numerous Chinese PV companies - big and small - being wiped out of the game in the last two years, largely due to a combination of overcapacity and low market prices.

Series of Loan Defaults

According to LDK’s 2012 annual report, at the time of the report LDK held debt worth 5.42 billion USD (35.5 billion RMB) in total and had a total asset value of 5.275 billion USD, making the liability-asset ratio at an alarming 102.7%.

Amid mounting debt and ever-intensifying competition from home and abroad, sales have not been picking up for LDK either. Its gross profit margin has dropped from Q3’s -11.2% further to -60.5% in Q4, 2012. This has resulted in a chain of debt defaults that are further crippling the company.

Beijing Jingyuntong Technology Co Ltd (SHA:601908), one of LDK’s major suppliers, announced on May 7th that LDK is to pay 294 million RMB to Jingyuntong in liquidated damages for breach of contract, in addition to 3.44 million RMB in litigation expenses incurred from LDK’s appeal of the case. The latest news came on the heels of a series of loan and bond defaults on the part of LDK in the first five months of this year. On April 16th, LDK defaulted on convertible bonds worth 23.79 million USD. On April 23rd, LDK’s German acquisition Sunways AG (ETR:SWW) was denied a 6 million Euro credit line by the bank and was being chased up on its mortgage debts at the same time. “The dire situation of the company and the Chinese PV industry as a whole has resulted in the termination of all credits granted to LDK,” announced Sunways.

LDK’s Emergency Sell-Offs

In a desperate act of self-rescue, LDK has been selling off its assets at a discount to pay off its pending debts - an attempt that increasingly proves to be unsuccessful and ineffective. According to estimates, since October of 2012, LDK has sold off more than a third of its assets.

On April 26th, LDK sold 2.5 million new shares at 1.03 USD per share to Fulai Investments Ltd., a Hong Kong-based investment firm owned by Zheng Jianming, and gained 25.8 million USD in cash. Zheng has already purchased 17 million shares of LDK at 1.83 USD per share in March. The latest purchase will put his total stake in LDK at 42 million shares, 21.5% of LDK’s capital stock.

LDK has lost operational control of its Hefei subsidy to the Administrative Commission of the Hefei City High-tech Industrial Development Zone since August of 2012, when the Hefei plant ran into serious financial difficulties. On April 18th, further announcement was made that the Hefei plant was officially sold off to the city’s Hefei High-tech Industrial Development Social Service Corp at a price of 120 million RMB. The deal, however, still leaves the Hefei subsidy with a remaining debt of 90 million USD.

Meanwhile, LDK’s assets are becoming increasingly unattractive as investment retreats from the ailing solar PV market. The Hefei city government has been in communication with companies including Canadian Solar Inc. (NASDAQ:CSIQ), Trina Solar Limited (ADR) (NYSE:TSL), and Sharp Corporation (ADR)(OTCMKTS:SHCAY) in search of collaboration or possible sell-off deals, but none of the listed companies nodded their heads.

“The solar PV market is looking really bad at the moment. Everybody is cutting production and nobody is going to buy production facilities in bulk at the moment. As currently there is not a market for the (PV) products, the production lines and facilities will just go to rust,” comments a senior PV executive in Jiangsu Province.

On Oct 22nd, 2012, LDK announced another share purchase agreement with Jiangxi Hengrui New Energy, a newly propped-up subsidy that is 40% owned by the Xinyu city government and 60% by Beijing Hi-tech Wealth Investment and Developing Co., Ltd, selling off 19.9% of LDK’s shares to Hengrui at a heavily discounted 0.86 USD per share. But, according to a former employee of LDK, the deal was largely a ceremonial gesture to maintain market confidence in the company. Real-term investment into LDK from Beijing Hi-tech Wealth Investment and Developing was in effect nonexistent, as Beijing Hi-tech backed out of the investment based on LDK’s disappointing performance and the poor outlook of the PV market in general.

LDK has also been selling off its many solar PV power station development projects since the latter half of 2012.

Large-scale sell-offs are not, however, deemed as a viable solution to LDK’s crisis. As industry estimates demonstrate, even if LDK sold off all of its assets, the cash generated would not be able to cover all the debts. As of the end of 2012, LDK held cash and cash equivalents with an estimated value of 98.28 million USD, guaranteed bank deposits at 167 million USD, and assets for sale at 646 million USD, while the total amount of debt had reached 33.5 billion USD.

More Subsidies?

As is the case with many other Chinese PV enterprises, the government’s track record of continuous tax breaks, subsidies and bailouts still gives hope that favors may be bestowed yet again upon LDK, the shining star of the country’s PV industry just two years ago.

Since the beginning of 2012, the Xinyu city government has injected a total of 700 million RMB into LDK to sustain the company’s development. In May 2012, the Jiangxi provincial government agreed to “tide the company over” with an investment of 2 billion RMB.

However, the sheer size of LDK’s current debt may be too formidable and the industry landscape may have become too dire for such bailouts to be economically and politically sensible for the multiple levels of government involved. As criticisms from industry observers and economists mount on the government’s indiscriminating bailout of the domestic PV industry against market trend, there is reason to believe that the government may finally begin to pull the plug on LDK.