Chinese Solar: First Bond Default Likely Tomorrow

We're mere hours away from the likely default of one of the largest solar manufacturers in the world: Suntech Power (NASDAQOTH: STPFQ  ) . The latest news reports have bondholders forcing the company into an involuntary bankruptcy tomorrow if the company doesn't pay back $541 million in bonds. If that takes place it would be the first default for a bond issued by a company from mainland China.  

The likely default has implications for Suntech as well as many other companies in the solar industry.

What happens to Suntech?
In all likelihood, Suntech will go into some sort of default tomorrow. It's likely that stockholders will be wiped out and bondholders will be heading to court to try and retrieve some assets. But it's possible the company will survive in some form.

What we know for sure is that the central government or state-run banks won't be running to Suntech's rescue. If that were to happen it would have been done by now. Rumors are that the local Wuxi government will use its multi-billion dollar fund to bailout local manufacturing for Suntech. As I've said before, China's government is more concerned with employment than losing money, which is why local governments have helped LDK Solar (NASDAQOTH: LDKSY  ) and it looks like Suntech is next.

If the company does continue making panels it will be interesting to see how customers respond to a company that was losing loads of money, was mismanaged, and now had to be bailed out by a local government. If Suntech's finances were bad as a well-known public company, then I would hate to see how much it loses under government control.

What about the rest of Chinese solar?
The real fun begins when we think about the future of the giant Chinese solar industry. China's new government has said that consolidation in solar is necessary and it will allow companies to combine or fail but this is the first indication that they'll actually let that happen. Even in the past few weeks investors thought a white knight would arrive to save Suntech.

This has huge implications across the industry because Chinese solar manufacturers have billions of debt that they can't possibly refinance on the open market or fund with money-losing operations. JA Solar  (NASDAQ: JASO  ) has convertible bonds due in May, Trina Solar (NYSE: TSL  ) has convertible bonds due in July of this year, and LDK Solar has bonds due in February of next year. Each of these companies could potentially face the same challenges Suntech has had to face this week.

For those of you who have followed my solar coverage on Fool.com over the past year, you know I've said over and over again that highly indebted Chinese solar companies are incredibly risky and worth avoiding at all cost. If you must play in Chinese solar, do it with a less leveraged company like JinkoSolar (NYSE: JKS  ) , which is at least less likely to default in the next six months. Personally, I would stay away from Chinese solar altogether.

Foolish bottom line
It doesn't look like Suntech's likely bankruptcy will take the company entirely out of the industry but it's a step in the right direction for healthier competitors. The industry has about 70 GW of capacity and only about 30 GW of demand, so more manufacturers are going to have to go under before margins increase and we see anything close to a profit.

This is another reason to stick with U.S. solar manufacturers. They're not as sexy from a cost standpoint but they're much healthier financially, and it looks like the free flow of money from China is going to come to an end eventually.

One of those U.S. companies to watch is First Solar. Investors and bystanders alike have been shocked by First Solar's precipitous drop over the past two years. The stakes have never been higher for the company: Is it done for good, or ready for a rebound? If you're looking for continuing updates and guidance on the company whenever news breaks, The Motley Fool has created a brand-new report that details every must know side of this stock. To get started, simply click here now.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 14, 2013, at 4:55 PM, radelph wrote:

    The Chinese government never indicated that they plan to bailout solar manufacturers. So let the healthy consolidations begin. Of course we predicted this months ago - there's nothing new here. Only the stronger Chinese solar companies like TSL and JKS, who have prepared for this eventuality will survive. Their balance sheets and operations have been optimized over the last several quarters with a single outcome goal in mind. Survive the consolidations and prosper by fiat - profitable times are ahead!! I'm not convinced we can say the same for FSLR. More shall be revealed.

  • Report this Comment On March 14, 2013, at 9:24 PM, dsong wrote:

    You said to avoide all Chinese solars, this is deadly wrong. You do not have clue for Chinese operations.

    The solar and renewable energy is the strategy for China. China has 3 tril reserve in bank not like USA is in heavy debt and printing money for QE3 or 4.

    STP is in the catagory that it is too big to fail. However, its debt is too big to handle. More the ousted ceo Shi refused to give up 60% stake of stp. That let WuXi city very hard to help. Shi wants to keep every benefit he stole from shareholders and let government to clean the . That is differmessent from ceo of LDK.It is hard to be imagine in other countries. However, Wuxi will keep STP some parts alive anyway. Wuxi is a very rich city that its revenue is equal to a small country.

    Load China solars as much as you can. China has

    the amibitions to lead in solar how it can let the big ones down. It will definitely not happen, let alone

    China has 3 tril to handle any economic risk.

  • Report this Comment On March 15, 2013, at 10:29 AM, Foolsspin wrote:

    Motley said previous in their article on March 13'th

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    JA Solar (NASDAQ: JASO ) and Jinko Solar (NYSE: JKS ) have two of the better balance sheets, and they could pick up some of the slack

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    In this latest article March 15'th from Motley has there is no mention that JA Solar has one of the best balance sheets and only has said JKS has the best balance sheet. Why does Motley not talk about that now???

    No mention anywhere that $89.2 Million worth of these bonds were satisfied in June 2012. Motley comments further this has "huge" implications across the industry. What about the Fact JA has

    Now 2 days later Motley says, "This has huge implications across the industry because Chinese solar manufacturers have billions of debt that they can't possibly refinance on the open market or fund with money-losing operations. JA Solar has convertible bonds due in May

    This has huge implications across the industry because Chinese solar manufacturers have billions of debt"

    In this article there is no mention that JA Solar has one of the better balance sheets in the industry like they did on March 13'th.

    The remaining balance due on these notes is $130.5 Million & the remainder is not due til May 15'th. JA Solar has a Cash Balance Sheet of $545 Million. JA has never borrowed from the CDB. Several Chinese Solars have taken loans from the CDB, JA has not. They do not need to Less Also JA previously announced shipments in the 4'th Quarter are expected to be 25% Higher than originally estimated. I don't see this to be an issue Motley but I do see a spin from Motley.

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