Suntech Power (STP), one of China’s largest solar panel manufacturer, faces a payment deadline on March 15, for $541 million in convertible notes that it had issued to international investors. Though the firm has hired bankers to advise on restructuring its debt, there has been a lot of uncertainty as to the progress it has made. Now, all eyes are likely to be on the Chinese government to see if it bails out one of the largest and most distressed companies in the solar industry. We think that this is likely to be a litmus test not just for Suntech but for the Chinese solar sector as a whole since the government took a tough stand last December on supporting money-losing solar companies. Here is a quick look at the firm’s options and their viability.
Weak Financials; Asset Sales Not Viable: Paying off debt on its own is not an option for Suntech given its weak cash flows and liquidity position. The firm hasn’t reported a profitable quarter since Q1 2011. As of Q1 2012, the latest full quarterly results – total debt stood at over $2.2 billion while the equity position was just around $800 million. ((Form 6-K)) It is safe to assume that the situation has worsened since as pricing power in the industry deteriorated through much of 2012. The firm has also said that it didn’t have assets that it could sell that would raise sufficient cash to pay the debt.
Conversion Option Is Worthless: Although the notes are convertible, converting them into equity is unlikely to be an alternative since Suntech has a current market cap of just around $211 million, which is less than half the value of the bond issue. Moreover, the conversion price on these bonds is around $41 per share while the market price for Suntech’s stock is currently below $1.20, making the conversion option worthless to bondholders. 
Progress Of Refinancing/Restructuring Unclear: Last year, the firm hired UBS AG to help explore alternatives to pay these loans. The firm has reportedly been in talks with bondholders ahead of the deadline, but the details of if and how the restructuring will happen remains unclear. In the event that the firm restructures a portion of this debt into equity, it is possible that existing shareholders will get a raw deal. Considering the low value of the firm’s stock, a bulk of their equity in the company will be diluted.
Will The Chinese Government Support Suntech?
The Chinese central and regional governments have been supporting the domestic solar industry every step of the way since its inception from providing loans for capacity expansion to bailouts and funding for firms to meet liquidity needs. However, last December, the Chinese state council took a tough position on supporting money-losing solar firms, indicating that it would cut the financial support extended to them and would ban state governments from supporting them as well.
While Suntech definitely qualifies as a money-losing firm, the government could reconsider its stance due to the company’s large scale and its importance to the local economy (Suntech was the world’s largest panel manufacturer in 2011). As of February, Suntech was reportedly in talks with the regional government of the city of Wuxi for potential financial support, however, the scope and details of the support that the firm was seeking was unclear.  Suntech is headquartered in Wuxi, and received an emergency loan of around $32 million from the city’s government last year.
While Chinese solar firms have received funding from the government for their operations and capacity expansions, no company has received a bailout to pay foreign debts until now. If Suntech is bailed out, it could set a precedent for other companies such as Trina Solar (TSL) and LDK Solar (LDK) as well.
We have a price estimate of around $0.91 for Suntech, which is around 20% below the current market price. We will be closely watching the firm’s progress in resolving the issue, and would like to emphasize that our price estimate could change materially depending on the developments.
Disclosure: No positions