Suntech Power Holdings (STP) is in a downward spiral that will likely end in the shares being very nearly worthless. Ever since the initial reports of the EUR 550mm+ GSF fraud, the hits have just kept coming. Here are some of the reasons why we believe Suntech equity is on the fast track to zero:
- Rampant fraud at the company
- The Chinese have control of Suntech's major asset
- No cash to be found
- Vulture investors in Suntech's bonds will leave nothing for Suntech shareholders
- We've seen this type of situation unfold before … and it gets ugly
In July 2012, Suntech announced that "the Company may have been a victim of fraud" related to its GSF investment in an amount of nearly $700mm due to German government bonds that had either vanished into thin air or been forged to begin with. Multiple sources have indicated that Suntech management should have known better than to make the GSF investment in the first place because "[the projects] were too large to be viable and carried the added risk of possible encounters with criminals". Some of the other reasons are discussed in two lawsuits where Suntech and its management team are being sued for "misconduct".
In Ji v. Suntech Power Holdings et al. (CA 12-cv-6409), the plaintiff alleges that former CEO Zhengrong Shi:
"Arranged to have much of the wealth Suntech raised to be transferred out to other companies Shi owned and controlled. Shi caused Suntech to pay above-market rates, extend no-interest loans, and make commercially unreasonable prepayments, to suppliers. He also arranged to have employees on Suntech's payroll work for his other companies."
Separately, in Bruce v. Suntech Power Holdings et al. (CA 12-cv-04061), the plaintiff alleges a laundry list of fraudulent behavior outlined here:
"… in June 2010 when Euromoney Institutional Investor published an article in which Romero admitted to misrepresenting his connection to Suntech [as President of Suntech Spain]". Suntech invested in a joint venture in which their partner admitted to publicly lying about his relationship with Suntech!
The Chinese are in control
On 3/21/2013, Wuxi Suntech, the company's main operating subsidiary, was forced into bankruptcy by a consortium of eight Chinese banks. The Financial Times reports that the operating subsidiary has "almost $2bn of debt" and "assets may be less than a quarter that amount". According to a source close to the Chinese restructuring, in Shunfeng's latest bid for Suntech's Wuxi unit, "creditors, including banks and suppliers, will need to suffer deep losses for Shunfeng to move ahead with its acquisition." Given the staggering haircuts that local Chinese banks face on their loans, it stands to reason that U.S. creditors and shareholders will not see any value from this subsidiary that accounts for the majority of Suntech's manufacturing capacity.
No cash to be found
Three Suntech directors resigned in August of this year, citing "severe cash flow drain", "lack of clear business plan", "loss of critical talent" and "failure to pay outside legal counsel" as some of the key concerns leading to their resignation. These statements from insiders suggest that there is nothing left at Suntech, not even enough money to pay their lawyers. This is further confirmed by Trondheim's inability to collect on debts owed by Suntech despite securing a court-sanctioned judgment and sending a dozen subpoenas to banks in the U.S. looking for Suntech's accounts. The WSJ reports that Trondheim is a distressed-debt hedge fund that has been excluded from the Suntech restructuring process and provided no information on how it might recover its investment. If there is no money to pay lawyers and no money to pay judgment creditors, we think there is very unlikely to be any money for shareholders.
Distressed debt investors are going to take everything left over (if there is anything to be had)
Just in case there is anything left over after the Chinese banks get paid (and the lawyers get paid), the vulture funds that own Suntech's distressed debt have already spoken for it. In a notice to bondholders dated 7/15/13, Wilmington Trust as bondholder trustee wrote, "On June 28, 2013, the Company entered into a third forbearance agreement with a majority of the Noteholders to extend the forbearance period through August 30, 2013. The Third Forbearance Agreement contemplates an equitization of all major debt claims held by the Noteholders and allows Noteholders to nominate two additional members to the Company's board of directors to assist in the Company's ongoing restructuring efforts."
That sounds like existing shareholders will be massively diluted, which was confirmed in a company press release a few weeks later, when on 8/30/13, Suntech announced, "The Company intends to immediately commence preparations for implementing a recapitalization plan that contemplates a scheme of arrangement as part of a holistic restructuring of the Suntech Group. The principal components of the restructuring scheme would include…the exchange of outstanding debt into the Company's equity…there is expected to be substantial dilution for our existing shareholders."
The playbook from YRCW
We have seen how a distressed situation with significant shareholder dilution plays out via the most recent YRC Worldwide restructuring (YRCW). In February 2011, YRC announced a restructuring in which the "term sheet contemplates a very substantial dilution of existing equity holders." Then in April, the Company unveiled further details of the restructuring that "would result in the company's existing shareholders holding approximately 2.5% of the company's outstanding common stock subject to further dilution by a management incentive plan and the conversion of certain new securities".
Finally, in September 2011, YRC announced the approval of the previously contemplated restructuring plan and the door was shut on YRCW stock. An investor who held shares of YRCW in February would have lost of 97% of his investment, and an investor who held shares on the April 2011 restructuring announcement date would have lost over 96% of his investment.
Suntech has already said that there is expected to be substantial dilution for existing shareholders. Based on what happened in the YRC restructuring, this is a very ominous sign for Suntech shareholders, especially when all of the above factors are taken into account.
Given the widespread fraud, "severe cash flow drain", bankruptcy filing in China, preparations for commencing a scheme of arrangement (bankruptcy equivalent) for Suntech Power Holdings, and company stated expectation of substantial shareholder dilution, we believe Suntech equity is effectively worthless. If the YRCW roadmap serves as any indication of what's to come, Suntech shareholders should brace themselves for 90%+ losses from here.