Lights Dim At LDK As Deadline Looms

Nov.27.13 | About: LDK Solar (LDK)

I haven't written about LDK Solar (NYSE: LDK) for a while, so it seems like the release of its latest quarterly results might be a good chance for a final look before the lights go off permanently at this struggling solar panel maker. Somewhat appropriately, LDK announced its results on the same day it also said it continues to negotiate with international investors who are still waiting for an overdue payment on their bonds (company announcement). The bondholders have just agreed to extend their talks for another 2 weeks, but there's always the very real danger that they could force LDK into bankruptcy when this new deadline expires on December 10.

I'll return to the possibility of bankruptcy shortly, but first let's take a look at the latest results that show just how much LDK has shrunk over the last 2 years. LDK and the higher-profile Suntech (NYSE: STPFQ) have been the biggest victims of the painful restructuring taking place in China's solar panel sector. But while Suntech's slow dismantling in a Chinese bankruptcy court has received lots of media attention, LDK's overhaul has received much less scrutiny because it was never a very strong company even when the industry was booming.

The most notable element in LDK's latest results is its shrinking top line. The company reported just $157 million in third-quarter sales, and a net loss of $127 million (results announcement). Anyone looking at those latest figures would probably be most alarmed by the fact that the company's net loss was nearly as big as its total sales, which is reflected in the fact that LDK's operating margin for the quarter was negative 50 percent.

A look at the company's quarterly results just 2 years earlier provides plenty more reason for alarm. LDK's sales in the third quarter of 2011 totaled $472 million, meaning its sales have shrunk by about two-thirds over the last 2 years. The company's customers are undoubtedly flocking to more stable rivals like Trina (NYSE: TSL) and Canadian Solar (Nasdaq: CSIQ), which are more likely to still be in business a year or two from now.

LDK has managed to avoid bankruptcy over the last year by selling off assets and taking on new investors, resulting in a painfully slow downward spiral that has resulted in the huge sales drop. That strategy has worked to placate the company's state-run stakeholders, many of which are connected to government entities in LDK's home province of Jiangxi. But international bondholders aren't really interested in such face-saving moves, and simply want their money back.

Those bondholders were supposed to receive an interest payment on August 28, meaning the money is now 3 months overdue. I suspect this latest extension of talks could be one of the last, and that the bondholders will finally tire of playing games with LDK and force the company into a foreign bankruptcy court as early as next month. Some holders of defaulted Suntech bonds used a similar strategy last month, forcing the company into bankruptcy in a New York court, potentially delaying its overall restructuring (previous post).

One thing I find amusing in all this is that LDK's New York-listed shares have managed to stay at about the $1.60 level through this entire period of turbulence. Suntech's stock also stayed relatively high throughout most of its bankruptcy, but suddenly tanked when shareholders finally realized they would lose all their money after the company announced its formal liquidation and its stock was de-listed. I suspect the same fate will come soon for LDK, with shares likely to tumble when bondholders finally tire of playing games and force the company into bankruptcy.

Bottom line: LDK bondholders are likely to force the company into bankruptcy as early as next month, in the first step before a final liquidation and share de-listing.

Disclosure: No positions