LDK Solar Co., Ltd.’s (ADR)(NYSE: LDK) recent announcement of debt default sends shockwaves across the market. The once-shining star of the solar PV industry is showing signs of becoming the first mover of a destructive chain reaction that could affect key industry players - another sign that the PV industry is undergoing a harsh winter that has seen giants brought down to their knees.
On Tuesday (April 16th), LDK announced default on its convertible bonds valued at 24 million USD. The news came after two years of continuous capital injection from the city government of Xinyu, of China’s Jiangxi province, where LDK is based, as well as after the company’s numerous attempts at self-rescue through debt restructuring and asset liquidation.
At the moment, the company still faces debt totaling over 20 billion RMB.
The announcement raises concerns about the imminent prospect of several other industry players with close business ties to LDK, who are liable to great losses should LDK fail to pay its bills. Most notable among the high-stakes players surrounding LDK are: JS Huasheng Tianlong Photoelec. Co., Ltd. (SHE: 300029), Henan Xindaxin Materials Co., Ltd. (300080), and Liao Ning Oxiranchem, Inc. (SHE: 300082).
According to Tianlong’s semiannual report for the first half of 2012, LDK back then already owed Tianlong over 26 million RMB in debt, ranking third on Tianlong’s debtors list and accounting for 5% of Tianlong’s total accounts receivable. Xindaxin’s 2012 annual report shows LDK to be the company’s fourth biggest debtor at 28.4 million RMB, or 6.11% of Xindaxin’s total accounts receivable. In 2012, LDK also owes Oxiranchem debt worth 35.54 million RMB, which is 7.4% of the company’s accounts receivable, making LDK the company’s biggest debtor.
LDK has, in fact, been in deeper financial troubles than meets the eye, as the figures are masked by LDK’s numerous attempts at debt repayment and restructuring through alternative means. In Xindaxin’s case, 140 million RMB worth of LDK’s debt was repaid through a debt restructuring agreement. Three rooftop solar power stations of LDK were leased to Xindaxin at an annual fee of 9.9 million RMB for 6 years starting from Nov 1st, 2012. LDK’s debt to Oxiranchem was only reduced to its current amount after a share transfer deal between the two companies valued at 27.23 million RMB as part of LDK’s debt payment. The amount of debt prior to the transfer, taking into account other related fees, was a whopping 143 million RMB.
LDK’s downfall recalls the recent bankruptcy of Wuxi Suntech, subsidiary of Suntech Power Holdings Co., Ltd. (ADR)(NYSE: STP), another once-prominent leader in the industry. There are widespread speculations and concern whether LDK is heading toward the same end.
Hope still remains that the company will avoid bankruptcy and come to its resurrection by a new round of capital injection. There is also speculation that the city and provincial government will step in again for the rescue due to LDK’s critical position in the local economic ecosystem. Although according to Meng Xianxin, vice chairperson of The Chinese Renewable Energy Society, such endeavor would require capital in the tens of billions of RMB on top of repaying the existing debt of over 20 billion RMB, which is a formidable bill to foot for the now-battered company as well as for the Xinyu government.
However, the government’s track record and high vested interest in the company still seems to point in favor of likely intervention. In 2011, at 1.36 billion, LDK has become Xinyu’s biggest tax contributor. New energy output value has surpassed metal to become Xinyu’s primary source of revenue, totaling at 42.147 billion RMB. Since the beginning of 2012, the Xinyu city government has injected a total of 700m 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.
A tumultuous year for China’s solar PV market has seen big profit generators in the past crumbling to their demise. With losses on this scale, the fate of LDK is hardly at its own hand any more. It still remains to be seen whether the company’s management and various interested parties would join efforts to engineer the company’s comeback or follow Wuxi Suntech’s precedence, surrender to the current harsh climate and let the dying die.
