LDK Solar (NASDAQOTH: LDKSY ) is the latest Chinese solar manufacturer to enter into a forbearance arrangement with noteholders, putting off bankruptcy, yet again. This follows months of forbearance for Suntech Power (NASDAQOTH: STPFQ ) , the other solar manufacturer that is so indebted, it can't pay its bills.
What is forbearance, and how are solar companies using it?
Forbearance: A stay of execution
A forbearance arrangement/agreement in its simplest form is a debtor putting off paying interest or principal to a lender until the debtor can acquire more funds. In the case of LDK Solar, they've entered into a 30-day "forbearance arrangement" for its U.S. $-Settled 10% Senior Notes due 2014. These notes had interest due on August 28, 2013, and still hasn't been paid by the company.
Note that this is an "arrangement," not an "agreement," indicating that lenders didn't come along willingly. By contrast, Suntech's first forbearance agreement in March included the agreement of 60% of noteholders. LDK Solar made no such claim in its latest release.
The big question is: Why aren't these companies bankrupt already? In the U.S., if you miss a debt payment, your lenders demand payment, and will likely force you to file for bankruptcy, at which time you either reorganize your capital structure, or liquidate the company. But these companies aren't U.S. companies, so the same rules don't apply. In fact, we're in uncharted territory here because Suntech was the first company from Mainland China to default on U.S. debt.
Even Suntech's ongoing reorganization is confusing, with its largest subsidiary in bankruptcy and state-run banks involved in the process. There's little likelihood that reorganization would leave U.S. stockholders with much of anything; yet the company is worth $250 million on the market today. LDK Solar is essentially in the same position, with little value for shareholders at this point in the game, no matter how debt negotiations play out.
Balance sheets matter
This is another warning that balance sheets matter in solar. LDK Solar ended last quarter with $2.8 billion in debt, and just $114.7 million in revenue, not nearly enough to pay back what it owes.
A terrible balance sheet is also what sunk Suntech, which was the largest solar manufacturer in the world as recently as last year. The next company to be concerned about is Yingli Green Energy (NYSE: YGE ) , which has $2.8 billion in debt. The good news for Yingli is that it generated $521 million in revenue last quarter, and appears to be improving financially as the industry's margins rise. But is that too much debt to overcome? Only time will tell.
There will be losers in solar
Even if the solar industry grows at the most optimistic rates, there will be losers. There's not enough margin to pay for equipment built only a few years ago on borrowed money. Investors should focus on the companies with the best balance sheets and the highest quality products because that's where the money is. Chasing a company that can't pay its bills, like LDK Solar or Suntech Power, has a low chance of working out in the long run.
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