With a huge rise in the solar sector, Suntech Power (NYSE:STP) has reached over $1 per share with a market cap of over $200 million. At the same time, Suntech's convertible bonds haven't budged in value from 20+ cents on the dollar. After consulting two sources, who wish to remain nameless, I have found the reason the bonds are trading at all time lows is that the bondholders find it very unlikely that they will receive any of their money back. One source who owns bonds and is short the stock told me:
Notice that while the Suntech stock is rallying, the bonds haven't changed hardly at all. If there were value in the company, a big investor would buy the bonds. If you look at comments on Twitter, nobody has a clue about Suntech the company. They are just traders looking for momentum. Everyone should be buying puts on Suntech, it's an empty shell company now.
"If the bondholders don't get paid back 100%, then the stockholders won't get anything, right?" I asked the source. I always figured that is the case, but Suntech stock has such a big disconnect from the bonds, I thought there was an exception here.
"That's the solid rule with finance", he said. "Suntech is no exception."
Is Suntech Ignoring Overseas Stakeholders?
Suntech released 2012 revenues in May, but still needs to file its 2012 financial statements and refile its 2010 and 2011 statements. Suntech has laid off all of its old investor relations personnel. The company has recently hired a communications manager named Ryan Ulrich to answer investor inquiries, but he doesn't have any information that reveals anything new about the company. Suntech bondholders such as Trondheim Capital partners are still left in the dark regarding Suntech's restructuring activities. They are not being updated by the company. This scenario is typical of many Chinese reverse mergers in the past who have ignored and even ripped off their overseas stakeholders.
One of my sources said that what's happening with Suntech is akin to what happened with China Medical Technologies (OTCPK:CMEDQ).
China Medical Technologies' management completely went dark when it missed its coupon payment to its bondholders early last year. It owed bondholders hundreds of millions of dollars. The consensus belief is that management transferred the company's assets to business partners and relatives and completely disbanded the company. The overseas bondholders had no recourse because the Chinese government wouldn't play ball. CMEDQ has since got removed from the OTC exchanges and isn't tradeable. I believe STP is on the same path.
"The actions by the company have always been questionable", said the source. "It's former CEO (Shi Zhengrong) started a fake company (Asia Silicon) and funneled millions of dollars to it from Suntech. Shi is being sued in California for this by a Suntech shareholder."
It's tough for bondholders like Trondheim to sue Suntech. The China court system is different from that of the US and there's a lot of doubt that the US courts would be able to seize Suntech's assets from China.
Is The Bond Forbearance Agreement Real?
Suntech defaulted on $541 million of its bonds that were due on March 15th. It reportedly had a forbearance agreement with the bondholders and pushed the due date out to May 15th. When May 15th came around, the company again defaulted and pushed the payment due date out to June 28th. Trondheim wasn't told about or had any say in the forbearance agreements.
"I'm convinced that the forbearance agreement is a sham. We were never notified of it and Suntech never filed a copy of it", says one source. This source is a Suntech bondholder and knows other bondholders who weren't contacted either.
On May 22nd, Suntech management is meeting with the Chinese banks that invested in Wuxi Suntech, Suntech's main subsidiary. These banks' debt is senior to that of the convertible bondholders. We'll see if any information will be reported from that meeting.
No Outside Investor Wants To Touch Suntech
There has been no sign of any willing investors who might buy Suntech's debt or stock to help bail out bondholders and stockholders. It looks like potential investors are waiting for Suntech to go bankrupt before bidding on its assets.
One source said that after speaking with solar panel customers, investors, and analysts, he learned that Suntech now has a tarnished reputation among solar panel buyers. Its solar panels are of basic quality, and there is no reason for a customer to buy Suntech panels when they could easily buy from a company that is more stable and reliable. Now that Suntech is on the verge of bankruptcy, a potential big customer would also be hesitant to buy solar panels in bulk from them. There's no guarantee that Suntech's solar panels could be returned or replaced if something went wrong because the company probably won't be around much longer.
Suntech is selling its projects to other Chinese solar companies, so it's hard for new customers to predict who they will be dealing with in the future. Suntech has just sold one project in bankruptcy court to Shunfeng Photovoltaic International for $15.2 million USD. The panels were sold for 49 cents per watt, even though it costs Suntech 60 cents per watt to make them.
Suntech's GSF Subsidiary
Suntech's only subsidiary that might have some value to return some of the convertible bondholders investment, is its GSF Capital subsidiary. However, this is very unlikely as there have been reports that GSF is associated with the Italian mafia which was reported to have stolen panels from GSF's solar fields. GSF Capital hasn't recently reported its revenues, so it should be assumed that it is a toxic asset that will be very hard to sell.
Unlike Suntech, LDK Solar Could Attract Investors
If Suntech would have been able to attract an investor before the convertible bond payment was due, then there might be some hope that the company could eventually dig its way out of its debt hole. LDK Solar (NYSE:LDK), another Chinese solar manufacturer that's a pending bankruptcy risk, was able to raise funds from outside investors.
In April, LDK sold 25 million shares to Chinese investor Cheng Kin Ming at $1.03 per share. That boosts his company, Fulai Investments, stake to 25% of LDK. LDK had sold 17 million new shares to Fulai in February and March. It also sold 25.3 million shares to Heng Rui Xin Energy Co. on Oct. 22, now about a 15% stake.
However, no investor, not last year or this year, has shown any interest in purchasing Suntech debt or shares. The fact that Suntech hasn't been able to find investors says a lot about how deep its problems are.
"Suntech bondholders are hoping that the Chinese government will give them something" said my source who owns bonds. "Suntech doesn't have any assets that are worth investing in. It's likely that after the Chinese government shuts it down, it will just give its solar fields to another solar company."
Right now, it is mostly short term traders trading Suntech stock back and forth and bidding the price up. However, there are some traders and investors who genuinely think there's a chance the stock will be worth something. When that myth becomes dispelled, eventually, I believe STP will be trading for a few pennies like previous Chinese failures such as China Media Express (OTCPK:CCME).
Disclosure: I am short STP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.