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Last week, solar stocks surged across the board following news that Warren Buffett had agreed to invest $2.5 billion in a solar plant to be constructed by San Jose-based SunPower (NASDAQ:SPWR). Some investors were even lured into the trade on the mistaken assumption that Buffett had actually invested in the solar company as opposed to simply becoming a customer. SunPower rose as much as 45% on the day, with other solar names rising in sympathy. Virtually every name in the solar space experienced quite notable gains, including Trina Solar (NYSE:TSL), Canadian Solar (NASDAQ:CSIQ), Suntech (NYSE:STP), First Solar (NASDAQ:FSLR), Yingli Green Energy (NYSE:YGE), JA Solar (NASDAQ:JASO), LDK Solar and JinkoSolar (NYSE:JKS).

Many of these companies had already imploded to below $1.00 prior to the recent run-up. The company that faces the greatest challenge is Trina Solar, which is now headed toward a near-term insolvency. After a brief overview of the broader industry outlook, I will provide full details on the challenges bearing down on Trina from all directions.

Trina last closed at $4.92 after hitting a high of over $5.50 last week. The shares are up 125% from $2.19 just six weeks ago.

Evaluating the spike in solar stocks

Day traders who bought on the headline made out well, just as they did when they bought into the December headline that China was increasing solar subsidies to $2 billion. However, analysts and the financial press have been very quick and unanimous in pointing out that rise is clearly an irrational and unsustainable spike, which is wildly unjustified given the dire financial straits of these companies.

An article by Bill Alpert in this week's Barron's painted a truly bleak future for the publicly traded solar companies in 2013 and discussed the "Armageddon" call on the stocks. There is no good news in this article:

  • The European incentives which turbo-charged the entire industry are now largely gone
  • China has already created a massive oversupply globally
  • Polysilicon prices have fallen to $15 / kg - barely above the cost to produce it
  • Solar makers are locked into historical Polysilicon prices which were previously as high as $100-485 / kg and are now forced to sell below their own cost of production
  • Long-term employment (post construction) from solar projects is negligible, eliminating this as a government rationale to fund the solar industry

A separate article in Barron's described Buffett's solar project simply as "A [Buffett] subsidiary picked off an asset from one of the hobbled sector's companies," while pointing out that the solar stocks were due for a hefty correction.

Chris Lau took a balanced but negative view and noted that "Trina Solar has the greatest risk, as excess capacity remains in the industry."

Raymond James analyst Pavel Molchanov came out with a report stating that this was "a classic recipe for an irrationally exuberant 'junk rally'."

With Trina Solar, we can see that only one analyst maintains a share price target above current prices but even he rates the stock as a "Neutral." The only "analyst" with a buy rating on the stock is Capital IQ, who sees it at $5.00.

Barclays, RBC, Roth, Credit Suisse, Macquarie, China International Capital Corp, and Maxim all have price targets of $2.20-$3.00.

Axiom recently set a share price target of just $1.20 for Trina Solar, which is 76% below the last closing price.

Bond holders seem even more bearish than the analysts, as they have most likely focused on the insolvency aspect of Trina. Trina's outstanding convertible bonds are convertible at a price of $16.94, meaning that they will certainly not be converted when they come due in July and are now trading as pure straight bonds.

Funds that invest in "junk bonds" are reporting yields for junk debt of 6% in the current market euphoric and low interest rate environment. Yet with Trina, its bonds are now trading with a yield of 26% even though they are set to mature in just six months. This reflects the fact that bond holders have very substantial doubt about being repaid.

Last Thursday's gain of 30% pushed Trina to levels above $5.50, closing in on nearly a triple from recent lows. Just weeks ago, Trina had closed as low as $2.19 following very grim Q3 results and an even grimmer outlook for Q4. During this time there have been no new developments at Trina which might explain the rise. Instead, Trina has simply ridden a wave of positive sentiment for solar stocks as a whole.

Summary of Trina's near-term insolvency crisis

This recent surge in the share price has occurred despite the fact that the $400 million company is already deeply insolvent with over $14 billion in off-balance sheet liabilities. Now that Trina is selling its products below cost in advance of nearly $800 million in near-term debt maturities, the company is unlikely to survive as a public company in its current form for more than six months.

Although Trina had $599 million in cash as of September, it now has nearly $800 million in debt coming due over the next few weeks and months. Ignoring the effect of one-time accounting changes, we can see that Trina now has a negative gross margin, and it has already stated that it expects the negative gross margin to continue going forward even as revenues continue to decline each quarter.

The clear catalyst for Trina to make a move downward would be the release of its annual 20F report, which is due out in just 10 weeks. This auditor will likely require placing the $14 billion in off-balance sheet liabilities back on to the balance sheet at which time even casual readers would quickly realize the company's irreparable insolvency.

In June of 2012, Trina announced that it has switched auditors and appointed KPMG. The transition to a new auditor likely increases the chance that the off-balance sheet will now be recognized by an auditor with a current perspective on the magnitude of Trina's obligations.

As momentum traders rushed to cash in on the Buffett effect, it seems clear that very few of them could have possibly known the details of what they were investing in.

Some level of ignorance about Trina is understandable given that the most concerning details about total liabilities and negative margins are very much obscured when reading the headline numbers in its financial statements. While the headline numbers already look bad, they fall far short of reflecting the full details of Trina's financial condition. Many readers of Trina's financial statements may find this disconnect confusing.

Deeper analysis reveals that Trina's problems are so serious and rising so quickly that there's simply no time for investors to bank on the solar industry improving.

Buffett's purchase from SunPower will take over three years to complete. SunPower can arguably survive that long as a public company. However, due to its liability profile and deteriorating financial condition, it appears that Trina simply cannot.

Trina will certainly benefit from Chinese government life support, including subsidies. Trina's products will continue to be available in the market and ongoing projects will likely be completed. However, it would be Trina's creditors who end up owning the assets and the company while equity investors would likely be wiped out.

For those who have analyzed the company (as opposed to simply trading on headline news), this near-term outcome should be clear. With a market cap of just $400 million, Trina is now facing the following challenges:

  • Although Trina's balance sheet discloses total liabilities of only $1.9 billion, Trina also has over $14 billion of off-balance sheet liabilities.
  • These liabilities require Trina to purchase polysilicon at historic prices which will now preclude the company from making a profit on its sales, even to the extent that they are adjusted, delayed or renegotiated.
  • Although Trina had $599 million in cash as of September, it also has $1.2 billion of debt, with nearly $800 million coming due within just the next few weeks and months.
  • Since September, the cash balance has almost certainly decreased substantially due to the sales below cost, while current maturities of long-term debt continue to increase.
  • Trina's credit facilities are specifically designated for the construction of manufacturing facilities and are secured by those facilities. This means that these credit facilities cannot be used to repay its short-term debts.
  • In explaining its financial results, Trina has explicitly acknowledged that it was in part due to "the presence of irrational pricing by our competitors, especially those at risk of financial insolvency." Trina appears to be following an insolvency pricing policy as well.
  • As of Q3, Trina's income statement showed that it was selling its products at cost with a gross margin of just 0.8%. However, even this result was only made possible due to a one-time accounting provision.
  • In fact, the real result (which is not readily visible) is that Trina is now selling its products at below cost - meaning that the ability to generate profits or cash to repay debt is highly questionable.
  • Trina has already given guidance that a negative gross margin is expected to continue going forward.
  • Trina has also just lowered guidance for total PV shipments by 20% from previous guidance.
  • Trina has historically realized the vast majority of its sales from the US and Europe such that Chinese government subsidies to the solar industry will not be able to provide a material boost to overall revenues.
  • Anti-dumping penalties in the US and Europe were only beginning to take effect recently, and the negative impact of these will only become visible when the 20F comes out in coming weeks, right as Trina's substantial debts are coming due.

$14 billion of off-balance sheet liabilities

Trina currently has over $14 billion in off-balance sheet liabilities as a result of contracts which lock it into above market prices for purchases of silicon from suppliers including: Hemlock Semiconductor, GCL-Poly, Jiangsu Zhongneng, OCI, and Wacker Chemie AG. A list of the 52 contract agreements has been included as appendix I.

In some cases these require advance payments to suppliers before receiving any polysilicon. In the past this may have seemed like a reasonable and even necessary strategy in order to secure its supply of raw materials. However, now it is the case that Trina cannot justify the volume to which it has committed, while the prices make Trina uncompetitive in the market unless it sells its products at below its own cost. Because of this, Trina is now selling below cost in order to make sales. These liabilities do not appear on the balance sheet because the last date that they would have been evaluated by the auditor was in 2011. At that time, Trina's sales volume was over $2 billion annually (nearly double current levels), justifying the volume to which Trina was obligated. The price of polysilicon was nearly 5 times current levels, which justified the price to which Trina was obligated at that time. At the time, Trina was still able to pull in gross margins of nearly 20% vs. the negative gross margins at present.

As a result, these contracts were not flagged as material or as a going concern issue by the auditor. But now that Trina is locked in to buying more polysilicon than it can even sell at prices which are far too expensive to result in a profit, it is clear that these off-balance sheet contracts are very material and in a very negative way. The next 20F filing due out in 10 weeks will likely make this clear to investors who have paid no attention to this issue since 2011. If Trina were a 10Q filer, investors would probably have known about these problems much sooner, but 20F filers have far lower disclosure requirements on their Form 6Ks.

When announcing its Q3 results and the negative gross margin, Trina noted that:

Our third quarter sales were adversely impacted by the ongoing supply-demand imbalance in the global PV industry, high inventories and the irrational pricing practices by some competitors in the market," said Mr. Jifan Gao, Chairman and CEO of Trina Solar. "These factors contributed to declines in our average selling prices, despite cost improvements of our key materials.

The already realized "cost improvements" were the result of renegotiation of Trina's existing purchase contracts by which Trina was locked in to purchasing polysilicon at high historical prices in an environment where the price of the material is now constantly declining. In 2008, polysilicon fetched prices as high as $475 per kilogram, but now that price has fallen to just $15 per kilogram, a decline of 97%. Even in 2011, polysilicon was still fetching as high as $85 per kilogram, such that current prices represent a drop of 83% vs. a year prior. Locking in prices in a falling market is now having the predictable effect on Trina's ability to achieve any profits, and Trina has thus been making every effort to renegotiate. In some cases we can see that Trina can purchase less than it indicated in the contracts in the short term, but is still obligated to make up for any shortfall in subsequent years. So even though the current purchases are less than what was agreed to, the liability in subsequent years is ballooning as a result.

Despite the renegotiation, Trina continues to sell at below cost and has disclosed that it expects to continue selling below cost going forward.

Trina is a 20F filer, meaning that there is extremely limited disclosure provided on 6K's during the year. This is notably different than what would be required for a US-based 10Q filer. As a result, no update has been given regarding Trina's off-balance sheet liabilities since the 2011 year end results. Of the $14 billion in private supply contracts, Trina now has over $3 billion due in the next two years alone.

There are two near-term problems with these off-balance sheet liabilities: size and price.

For the size, we can see that Trina is obligated to purchase over $3 billion of materials just during 2013 and 2014. This large volume may have appeared achievable when these contracts were entered, but we can now see that Trina's sales have been declining in every single quarter to such an extent that Trina now appears unlikely to be able to purchase all of what it has committed to. For example, Q3 2012 sales were 38% lower than Q3 2011, following a sequential decline in each and every quarter.

The decline in Trina's quarterly sales is shown as follows:

Sep 2012

Jun 2012

Mar 2012

Dec 2011

Sep 2011

Revenue

$298.0

$346.1

$349.9

$435.7

$481.9

QoQ decline

-14%

-1%

-20%

-10%

Overall decline

-38%

USD millions

Given that polysilicon makes up just one portion of costs, it becomes clear that there is no conceivable way for Trina to make good on its purchase commitments if it is relying on sales to do so.

The price is equally problematic. Trina began entering these private supply contracts at the peak of the polysilicon bubble in an attempt to secure price, quantity and duration for its future supply.

The specific prices have been redacted by Trina, presumably for "competitive reasons." However, the world is well aware that prices for polysilicon have been on a steep and steady decline, falling 97% since that time, and falling by more than 83% just over the past year alone. As a result, it is safe to assume that there is no competitive secret being withheld from the market by which Trina is somehow getting huge volumes of polysilicon at a bargain price. Instead, it is certainly the case that Trina has locked in obligations to purchase polysilicon at the higher historical prices even though the price has plummeted.

The contracts do have adjustment clauses such that if the market price of polysilicon falls, Trina can get some adjustment. However, given that the price of polysilicon was previously several hundred percent higher than it is at present, it is difficult to imagine that there is any level of adjustment that could get Trina to anywhere near market prices.

In addition, with the price of polysilicon now sitting at just above the cost to produce it, suppliers have no more room to cut their price.

This evidence is borne out simply by looking at Trina's recent negative gross margin, which shows even after renegotiation Trina is selling products below cost. In addition, Trina has stated that it expects to continue selling at a negative gross margin going forward. We know that the price of solar cells has fallen in the overall market, which has lowered Trina's revenue. But much of price declines for solar cells in the market is due to the falling price of polysilicon which other solar manufacturers are now using to lower their prices. With Trina locked in to any reference to the historical prices, Trina's future ability to sell its products for any profit whatsoever now appears impossible.

The polysilicon suppliers with whom Trina entered these off-balance sheet contracts did so because they needed revenue certainty to undertake huge financings and investment in order to expand their capacity. These suppliers relied on Trina's contracts when sizing their funding and expansion plans. While they have undoubtedly been willing to allow some level of renegotiation due to Trina's deteriorating finances, they will certainly need to maximize whatever remaining level of income they can derive from Trina just to support their own businesses.

In any event, the fact that these obligations are off-balance sheet could be confusing to investors who simply read the headline numbers and who neglect to read the detailed footnotes and attachments to the financial statements.

Trina's cash shortfall vs. near-term debt needs

As of September, Trina announced that it had $703 million in cash and restricted cash, but that statement did not include the breakdown of each, which is quite important.

Looking at the balance sheet, we can see that Trina has $599 million in cash, while $103 million is "restricted cash." The reality is that "restricted cash" simply does not matter because the money is already spoken for and cannot be used for paying down debt as it is being held as collateral for other ongoing obligations. As defined by Trina:

Restricted cash is comprised of bank deposits held as collateral for letters of credit, commercial paper, bank drafts and bank borrowings as well as amounts held by counterparties under forward contracts.

Clearly Trina's announcement about the $703 million could be confusing to readers who don't realize that restricted cash is entirely unusable by Trina.

Given that Trina has been selling below cost, it is safe to assume that the cash balance of $599 million has now decreased since it was reported as of four months ago.

In November, Trina announced that:

The Company decreased its short-term borrowings by $44.0 million to approximately $689.7 million as of September 30, 2012. During the third quarter of 2012, the Company also repurchased $14.9 million of its senior convertible notes due July 2013, which resulted in a gain of $1.8 million.

However, we can see by looking at the balance sheet that between Q2 and Q3, short-term debts, including current portions of long-term maturities, increased from $733 million to $778 million. These numbers are as of September, so presumably additional long-term debts are now rolling into the 12 month "short term" period, meaning that near-term maturities have increased even more.

The statement by Trina about decreasing its borrowings could therefore be confusing to some investors who are focused on near-term solvency.

And last, we also know that these debts are coming due in less than six months at a very maximum. We know this because Trina disclosed the $731 million in near-term (12 month) maturities as of June 2012 such that they will be due by June 2013 at the very latest.

So the near-term conclusion is that Trina is now roughly $200 million short of what it needs to pay its creditors in the next few months, with some maturities occurring even earlier than that.

Falling sales with negative gross margin

Trina will be unable to pay its near-term debts from operating cash flow because Trina is now selling its products below cost, effectively losing money on every sale.

In its announcement, Trina specifically noted that part of the reason for its 0.8% gross margin was due to a one-time write down of inventory which resulted in a one-time accounting charge of $13.3 million.

What Trina didn't point out was that gross profit was artificially boosted by an even larger one-time accounting gain of $25.8 million due to the reversal of anti-dumping provisions that it had previously taken.

Without these accounting adjustments, Trina's real gross profit (i.e. loss) for the quarter was negative $10 million. The disclosed 0.8% gross margin could therefore be confusing to investors who wrongly assume that Trina is selling its products above cost.

In fact, neither of these events should be expected to be one-time occurrences.

In 2011, Trina took a total of $22 million in inventory write downs. This amount began increasing dramatically in 2012 as shown:

Q4 2012

Q3 2012

Q2 2012

Q1 2012

TOTAL

Inventory write down

TBD

($13.3m)

($26.1m)

($21.1m)

($60.5m)

Based on this disclosure, combined with the fact that solar cells continue to fall rapidly in price, the conclusion is that inventory write-downs will not only continue, but will also increase for Trina.

In addition, the timing of Trina's decision to reverse its previous anti-dumping provisions (which resulted in a $25 million accounting gain) is a very curious one. Just prior to the release of Trina's quarterly results, the US government announced substantial anti-dumping actions against Chinese solar makers such that, if anything, Trina should be increasing any such future accounting provisions rather than eliminating them. The announcement of additional solar subsidies following the release of Trina's Q3 results could also lead to further anti-dumping scrutiny by both the US and Europe.

Had Trina maintained and added provisions for future anti-dumping exposure, the result would have been a gross loss of $40-50 million, as opposed to an accounting gross profit of $2 million.

The first conclusion from this is that investors should now obviously expect that Trina's losses going forward will be drastically larger than the $57 million that the company lost in Q3 alone. The second (and more important) conclusion is that Trina's losses will create a further drain on cash such that the $599 million cash balance that we saw as of September will likely be drastically lower when we see the 20F filing in 10 weeks, right when Trina's roughly $800 million in debt starts coming due.

For reference, Trina's quarterly net losses of the past five quarters can be summarized as follows:

Subsidies in China vs. anti-dumping penalties abroad

In early November, the US government announced that sweeping anti-dumping penalties would be imposed on Chinese manufacturers of solar cells. The announcement was followed by a predictable selloff in shares of Chinese solar companies.

Shortly after that, China announced that it would be providing subsidies to the domestic solar industry and that announcement was followed by a very predictable rise in the shares of the Chinese solar shares.

The two situations create a bit of a conundrum for Chinese solar makers. In September, Trina responded to European anti-dumping penalties by saying:

Trina Solar products are neither dumped nor subsidized.

Yet within weeks China had already announced that the industry would be broadly subsidized. According to Bloomberg:

China started offering the subsidies since 2009 to bolster the use of solar power.

Given that the US penalties were announced prior to the Chinese announcement of further subsidies, this raises the question of whether or not US penalties will actually be increased further now that China is offering further subsidies to the perceived dumpers. That result remains to be seen. It may be the case that the subsidies are only flowing to domestic projects and that there is no dumping. Alternatively, it may also be the case that the money received from the Chinese government (supposedly with respect to domestic projects) is perceived as being fungible. If this is the case, then the solar makers' low prices in the US and Europe are benefiting from the inflow of cash from the Chinese government and that would be perceived as a clear example of dumping.

Another aspect to analyze is the relative impact of the two forces, the benefit of the Chinese subsidies vs. the damage from the US and European penalties.

When China announced the subsidies, it noted that the amount would be $2 billion. In trying to determine how relevant that number is, it is important to view it in the context of total solar revenues for the major Chinese solar makers.

Name

Ticker

LTM Revenue

LTM Profit

Canadian Solar

CSIQ

$1,474m

($150m)

Trina Solar

TSL

$1,430m

($245m)

Suntech

STP

$2,679m

($587m)

LDK Solar

LDK

$1,147m

($1,165m)

JA Solar

JASO

$1,076m

($232m)

Yingli Green Energy

YGE

$1,701m

($860m)

JK Solar

JKS

$752m

($167m)

Total

$10.2 billion

($3.4 billion)

Several conclusions can be drawn from the table above. First, generating massive revenues does not appear to be a problem for the industry, but making a profit is clearly challenging as the group has collectively lost over $3 billion in the past year alone. Second (and more importantly), the total revenues for this group are in excess of $10 billion over the last 12 months. Although the concept of Chinese subsidies made for a great headline for day traders, it is clear that the actual amount of the subsidies is not even material to any of these companies once it is spread out over the entire industry.

By contrast, the anti-dumping penalties will have a very material effect on all of these companies for two reasons. First, the penalties are very large for each of these players. Second, the penalties are hitting the Chinese solar makers in the markets from which they derive the vast majority of their revenues, in comparison to China which provides a very small percentage of their revenues.

The penalties by the US include the following:

The Commerce Department said in a statement today that it will impose duties of 18.32 percent on the value of Trina Solar imports after finding its goods were sold -- or "dumped" -- in the U.S. below cost. The department in May set 31.14 percent preliminary penalties on the company's merchandise. Suntech, the world's largest solar-power equipment maker, faces anti-dumping duties of 31.73 percent, compared with a rate of 31.22 percent set in May…… Separately, the Commerce Department set higher final anti- subsidy tariffs on Chinese producers in response to what the U.S. said is government support that violates trade rules. It set a rate of 15.97 percent on solar cells made by Trina, up from a preliminary rate of 4.73 percent imposed in March, and 14.78 for those made by Suntech, up from 2.9 percent.

A final problem is that the Chinese subsidies simply serve to boost demand for solar. This will presumably boost sales, but not necessarily result in any profits for the solar makers. The solar makers will continue to sell more products, but will also continue to lose money in doing so. And as we know, with only $2 billion spread across the industry, even the impact of revenues is expected to be minimal for each player.

By contrast, the penalties are very large, are specific to the players in the industry and (unlike subsidies) the penalties will flow directly to the bottom line (net loss) for each of these players.

So the conclusion is that the initiation of subsidies just after the imposition of penalties by the US and Europe is akin to putting a band aid (Band-Aid is a trademark and we're likely to hear from lawyers if we don't capitalize it) on the victim of a plane crash. It's a good idea, but relative to the overall needs of the victim it is certainly not enough.

Credit facilities

As with many industries, the Chinese government and Chinese banks have been very generous in their support of solar.

However judging by from the size and terms of its more recent credit facilities, it is clear that Trina's credit is drying up even with these sources. A full list of Trina's bank facilities, along with the amounts drawn and the restrictions on the use of proceeds is included as Appendix II.

Trina's most recently disclosed credit facility consisted of $4.8 million from Agriculture Bank of China in 2011, "which is designated solely for square crystal silicon heterojunction solar battery research, development and production" and which Trina drew down fully within days.

The obvious concerns here are that Trina is now to a point where it is down to borrowing just a few million dollars at a time, while in years past it could expect access to hundreds of millions at a time. Of greater concern is that Agriculture Bank of China required collateral of $8.4 million in order to grant a loan of just $4.8 million. In effect, the bank is now requiring double collateral before giving money to Trina.

In the ordinary course of business, banks might be expected to require anywhere from 0 to 25% collateral. Had the bank required 100% collateral, the risk evaluation would already be quite severe and would reflect the bank's concerns about being repaid the principal. But requiring double collateral (i.e. more than the principal of the loan) means that the Chinese bank is perhaps concerned about Trina's ability to even repay the interest. This would mean that Chinese banks are now even more concerned than US bond holders in terms of assessing Trina's prospects for remaining solvent in the near term.

We can see that as the prospect of insolvency has grown for solar makers, the banks have been taking ever greater protective measures accordingly.

Looking at Trina's bank facilities shows that the Chinese banks have been very particular about specifying quite precisely how the proceeds can be used as well as requiring very specific collateral. These are not simple loans of cash which can be used in whatever way Trina desires (such as the repayment of existing bonds).

For example, restrictions on the loans include the following:

  1. designation for trade finance / hedging products
  2. solely for the expansion of a specific facility
  3. to finance business activities in Europe
  4. solely for capital expenditure

Trina did previously secure one (less restrictive) loan for $180 million for use as working capital. However, this loan had already been fully drawn down (and presumably spent) as of the end of 2011.

The point is simply that, based on their recent and historical activity, the Chinese banks appear unlikely to extend hundreds of millions of new loans to Trina just so that Trina can repay US bondholders and other banks which Trina is currently unable to repay. No one appears eager to go to the end of the repayment line with the knowledge that there is over $1 billion in debt in front of them before they can get repaid themselves, at a time when Trina is bleeding ever increasing amounts of cash.

As noted in Barron's, "LDK Solar [LDK] was recently on the brink of going out of business. The government and banks came in and bailed them out, to the tune of hundreds of millions of dollars. The same thing happened with Suntech."

Yet, post bailout, we can see that even with the recent rally, LDK has only risen to $2.14 at present, up from a low of $0.71. STP (with revenues nearly double those of Trina) has rallied back to $1.87 and is also up from a low of $0.71.

In fact, these bailouts are a significant part of the problem. Had China let LDK and Suntech fail, then Trina might have a slightly better competitive position in the market due to the absence of two large competitors who now continue to put pressure on pricing.

Instead, the Chinese government attempted to stuff too many passengers into the lifeboats, raising the risk that all of them will drown rather than saving just a few. At some point in time, China will have to face the reality of the simple math facing these companies and let some of the least savable companies go under as public companies.

Due to the depth of its problems, Trina is likely a good candidate for the Chinese government to sacrifice because there is no math in the foreseeable environment which would allow the company to a) earn a profit, b) honor its existing contracts, and c) fully pay its debts to creditors.

APPENDIX I - LIST OF PRIVATE SUPPLY CONTRACTS

No.

Date

Agreement

Contract #

1

29-Mar-08

Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-0

2

19-Aug-08

Supplementary Agreement (1) to Polysilicon Original Agreement and Supplementary Agreements

TCZ-A1130-0803-CGC-120-0

2

19-Aug-08

Supplementary Amendment to Supplementary Agreement (1) to Polysilicon Original Agreement and Supplementary Agreements

4

8-Dec-08

Memorandum

5

21-Jan-09

Memorandum

6

1-Apr-09

Contract Performance Memorandum

7

4 May 2009

Contract Performance Memorandum

TCZ-A1130-0803-CGC-120-C

8

20-Jul-09

Contract Performance Memorandum

TCZ-A1130-0803-CGC-120-D

9

25-Jul-09

Contract Performance Memorandum

TCZ-A1130-0803-CGC-120-E

10

31-Jul-09

Contract Performance Memorandum

TCZ-A1130-0803-CGC-120-F

11

24-Aug-09

Supplementary Agreement (2) to Polysilicon Original Agreement and Supplementary Agreements

TCZ-A1130-0803-CGC-120-0

12

26-Oct-09

Supplementary Agreement (3) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-G

13

20-Nov-09

Contract Performance Memorandum 09-12

TCZ-A1130-0803-CGC-120-H

14

15-Dec-09

Contract Performance Memorandum

TCZ-A1130-0803-CGC-120-J

15

12-Jan-10

Contract Performance Memorandum

TCZ-A1130-0803-CGC-120-K

16

23-Feb-10

Contract Performance Memorandum

TCZ-A1130-0803-CGC-120-L

17

29-Mar-10

Supplementary Agreement (4) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-0

18

Apr-10

Memorandum (1) of Supplementary Agreement (4) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-0

19

2-Apr-10

Contract Performance Memorandum

TCZ-A1130-0803-CGC-120-M

20

26-Apr-10

Contract Performance Memorandum

TCZ-A1130-0803-CGC-120-N

21

14 May 2010

Memorandum (2) of Supplementary Agreement (4) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-2

22

7-Jul-10

Contract Performance Memorandum

TCZ-A1130-0803-CGC-120-O

23

29-Jul-10

Contract Performance Memorandum

TCZ-A1130-0803-CGC-120-P

24

30-Jul-10

Memorandum (3) of Supplementary Agreement (4) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-3

25

24-Aug-10

Memorandum (4) of Supplementary Agreement (4) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-4

26

30-Aug-10

Contract Performance Memorandum

TCZ-A1130-0803-CGC-120-Q

27

29-Sep-10

Supplementary Agreement (5) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-5

28

16-Oct-10

Supplementary Agreement (6) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-R

29

30-Oct-10

Supplementary Agreement (7) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-S

30

30-Dec-10

Supplementary Agreement (8) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-6

31

3-Dec-10

Supplementary Agreement (9) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-T

32

11-Jan-11

Supplementary Agreement (10) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-7

33

28-Dec-10

Supplementary Agreement (11) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-U

34

26-Jan-11

Supplementary Agreement (12) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-2011-1

35

2-Apr-11

Supplementary Agreement (13) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-2011-2

36

28-Apr-11

May 2011 Memorandum to Supplementary Agreement (4) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-2011-3

37

7-Jun-11

Memorandum (1) to Supplementary Agreement (10) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-8

38

21-Jun-11

Memorandum (2) to Supplementary Agreement (10) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-9

39

21-Jun-11

Memorandum (3) to Supplementary Agreement (10) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-10

40

24-Jun-11

June 2011 Memorandum to Supplementary Agreement (4) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-2011-4

41

25-Jul-11

Memorandum (4) to Supplementary Agreement (10) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-11

42

14-Oct-11

Memorandum (5) to Supplementary Agreement (10) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-13

43

18-Oct-11

October 2011 Memorandum to Supplementary Agreement (4) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-2011-5

44

31-Oct-11

Memorandum (6) to Supplementary Agreement (10) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-14

45

8-Nov-11

Memorandum (7) to Supplementary Agreement (10) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-15

46

14-Nov-11

Memorandum (8) to Supplementary Agreement (10) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-16

47

25-Dec-11

Memorandum (9) to Supplementary Agreement (10) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-17

48

25-Dec-11

Memorandum (10) to Supplementary Agreement (10) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-18

49

5-Jan-12

Memorandum (11) to Supplementary Agreement (10) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-19

50

11-Jan-12

Memorandum (12) to Supplementary Agreement (10) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-20

51

6-Feb-12

Memorandum (13) to Supplementary Agreement (10) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-21

52

22-Feb-12

Memorandum (14) to Supplementary Agreement (10) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-22

53

2-Mar-12

February 2012 Memorandum to Supplementary Agreement (4) to Polysilicon Supply Agreement

TCZ-A1130-0803-CGC-120-2012-1

Appendix II - Trina Borrowings

In June 2009, we secured from Standard Chartered Bank (China) Limited revolving credit facilities totaling approximately $57 million, consisting of trade financing and hedge products. The facilities are aimed to provide financial support to our raw material procurement and product sales while helping us mitigate foreign exchange risks associated with market volatilities.

In July 2009, we secured loans of approximately $80 million due on June 30, 2010 from a domestic bank to support our East Campus capacity expansion project. The loans were denominated in Euros, U.S. dollars and Renminbi and bore annual interest rates linked to LIBOR for Euros denominated loan and U.S. dollar denominated loan and the basic one-year borrowing rate of the People's Bank of China for Renminbi denominated loan. These loans subsequently became part of a five-year syndicated loan facility we secured in September 2009 to support our East Campus capacity expansion project.

In September 2009, Trina China entered into a five-year credit facility of approximately $322.0 million, consisting of RMB1,524.6 million Renminbi denominated loan and $80.0 million U.S. dollar denominated loan, with a syndicate of five PRC banks led by the Agricultural Bank of China and Bank of China. Approximately $285.1 million of the facility are designated solely for the expansion of our production capacity, with the remaining to be used to supplement working capital requirements once the capacity expansion is completed. The facility can be drawn down either in Renminbi or U.S. dollars. As of December 31, 2011, we had drawn down approximately $254.0 million under the facility. The remaining facility to supplement working capital requirements can only be drawn on or after the date of completion of capacity expansion. The weighted average interest rate for borrowings under the facility was 6.5% for the year ended December 31, 2011. Interest is payable quarterly or biannually in arrears for loans denominated in Renminbi and U.S. dollars, respectively. Interest rate applied for Renminbi-denominated borrowings is the same interest rate stipulated by Chinese central bank plus 10%. U.S.-dollar denominated borrowings are subject to the six-month London Interbank Offered Rate plus 3%. The facility is guaranteed by Trina and collateralized by the property, plant and equipment of the project and the related land-use right. For purposes of the expansion, we are required to match draw-downs from the facility with an equal amount of cash from sources other than the facility. The terms of facility also contain financial covenants which, among other things, require that specified a debt to total assets ratio, net profit ratio and income to interest ratio be maintained. As of December 31, 2011, Trina China had violated the income to interest ratio covenants. Trina China obtained a waiver letter from Agricultural Bank of China, the leading bank in the syndicated loan, on February 8, 2012, to waive the covenants for the whole facility period.

In January 2010, Trina Solar (Luxembourg) S.à.r.l., or Trina Luxembourg, one of our wholly-owned subsidiaries, entered into a 15-year credit facility with China Development Bank under which Trina Luxembourg can draw down up to €100 million within one year commencing in March 2010. As of December 31, 2011, we had drawn down approximately €41.3 million ($53.4 million) under the facility. The remaining facility expired on March 14, 2011. The interest rate for borrowings drawn under this facility is the six-month Euro Interbank Offered Rate plus 3%. The repayment of the credit facility is guaranteed by Trina China. Trina Luxembourg can only use the proceeds of a draw down to finance its business activities associated with certain downstream projects in Europe. We are required to match draws under this facility with construction of solar plants.

On May 17, 2011, Trina China and The Export-Import Bank of China entered into a three year credit facility for $40.0 million, which is designated solely for capital expenditure purposes. As of December 31, 2011, we had drawn down $14.0 million and had $26.0 million available. The facility is guaranteed by Trina Solar Limited. The facility contains a specific debt payment coverage ratio covenant.

On June 29, 2011, Trina China and China Development Bank entered into three year credit facility for $180.0 million, which is designated for working capital. As of December 31, 2011, we had drawn $180.0 million. The facility contains certain financial covenants which require that a specified current ratio, quick ratio, debt to asset ratio, debt payment coverage ratio, interest coverage ratio, contingent liability ratio, current assets turnover and accounts payable turnover be maintained.

On December 7, 2011, Trina Solar (Changzhou) Science and Technology Co., Ltd. and Standard Chartered Bank (Hong Kong) Limited entered into a three year structured term loan facility for $100.0 million, which may be drawn down in single or multiple tranches within the first 12 months either in Hong Kong dollar or U.S. dollar. Each tranche is for a term of up to three year from the initial drawdown date, and may be extended for up to another two years at the option of the borrower. The facility is designated solely for the East Campus project, which is expected to add approximately 500 MW of cell and module capacity and feature our high-efficiency Honey cell technology. As of December 31, 2011, we had drawn down all $100.0 million. The facility is guaranteed by Trina and the property, plant and equipment for which the facility will be used to construct. The facility contains certain financial covenants that require that we maintain specified gearing, tangible assets to net value and EBITDA to interest ratios. According to the contract, the EBITDA to interest ratios is not applicable for the year ended December 31, 2011.

On December 23, 2011, Trina China and Agriculture Bank of China entered into a 36-month credit facility for RMB30.0 million ($4.8 million), which is designated solely for square crystal silicon heterojunction solar battery research, development and production. As of December 31, 2011, the Company had drawn down the full RMB30.0 million ($4.8 million). The facility is secured by the land use right of valued at $8.4 million.

We have historically been able to repay our total borrowings as they became due mostly from cash from operations and proceeds from short-term and long-term borrowings. We may also seek additional debt or equity financing to repay the remaining portion of our borrowings. As we continue to ramp up our current and planned operations in order to complete our vertical integration and expansion strategies, we also expect to generate cash from our expanded operations to repay a portion of our borrowings.

Source: Trina Solar: As Debts Come Due, $14 Billion In Off-Balance Sheet Liabilities

Additional disclosure: The author is currently short shares of TSL and may initiate a short position in other stocks mentioned in this article within 72 hours. The author has been an active long and short investor in the solar space for over 5 years and has lived, worked and traveled in China for more than 20 years. The author has formally studied Mandarin for 8 years. The author was previously a Director in equity capital markets banking for a major global investment bank. Over the past 5 years the author has shared his observations on US listed Chinese solar stocks with institutional investors in North America and China who may continue to hold long or short positions in stocks mentioned in this article. The author is not a financial adviser and no portion of this article is intended to serve as financial advice. The author's comments are his own views resulting from his own research and due diligence.