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Walter Lu
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  • Suntech's Current Situation 0 comments
    Apr 9, 2013 8:21 PM | about stocks: STP

    - STP (parent company) defaulted on $541m of convertible debt on March 15.

    - STP signed a forbearance agreement with 63% of bondholders that ends May 15. Meanwhile, the other 37% of bondholders can still legally force them into involuntary bankruptcy at any time.

    - Wuxi Suntech, their main operating subsidiary, is going through bankruptcy, meaning STP will no longer own them.

    - STP has other assets including GSF and some other small subsidiaries.

    - STP has over $1 billion liabilities including the $541m of convertible debt, $493m loan guarantee to GSF, and other loans/guarantees.

    If Buffett buys STP, he would be paying over $1 billion for GSF and the other subsidiaries. I highly doubt these assets are worth anywhere near that much, even before the solar industry crashed. If someone wanted to buy some or all of Suntech's assets, it would be much cheaper to buy them out of bankruptcy.

    Creditors need to be paid 100 cents on the dollar before equity gets anything. Yet the bonds are basically unmoved the past two days, which is telling (still trading under 30 cents on the dollar). If the bonds are saying one thing and the stock another, I'm going with the bonds. The bond yield was stratospheric when STP was still trading near $2.

    Buffett acquisitions fit a well-known mold: high quality, profitable businesses with competitive advantages, led by ethical management. Suntech Power is almost the complete opposite in every way: a distressed and very unprofitable business in a commodity industry with no competitive advantages, recently led by unscrupulous and/or fraudulent management at both Suntech and GSF. If Buffett catches the faintest whiff of unethical management, he won't go near it. Keep in mind that the investigations into fraud are still ongoing. I have a hard time thinking of a worse person to use for a buyout rumor.

    STP will eventually go to zero. It may go up a lot in the near term and if you want to trade it, that's your choice, but be cognizant of the risks. One of these days, it will declare bankruptcy, and you probably don't want to be long going into that.

    Disclosure: I am short STP.

    Stocks: STP
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