Last winter, I asked whether "Too Big to Fail" extends to the solar power industry. I was speaking about LDK Solar (NYSE: LDK), a company that has been a disaster for long-term shareholders (shares traded roughly three times higher on the day of the 2007 IPO), but has received generous state support in its native China.
Obviously, LDK is not systemically important to China in the way a financial firm like ICBC is. Still, the country is making a concerted effort to establish a globally competitive clean energy industry. One way to achieve this goal is to choose favorites. It's become clear to me that once Chinese solar companies reach a certain critical mass, they gain access to essentially unlimited financing from government-backed financial entities.
We saw this in July when Solarfun Power (Nasdaq: SOLF) secured a credit facility with a single bank that exceeded the company's entire market cap at the time. This deal made it clear that Solarfun is one of China's favored firms.
LDK, the world's largest solar wafer producer, is another. Underlining this fact is this week's news of a "strategic financing agreement" with China Development Bank, a 100% government-owned entity. CDB, which cut similar deals with Trina Solar (NYSE: TSL) and Suntech Power (NYSE: STP) earlier this year, has offered to extend LDK credit of up to $8.9 billion. We're talking about a company with $1.5 billion in trailing revenue. This is what I mean by an "essentially unlimited" financial backstop.
I've warned investors repeatedly that LDK, with leverage ratios considerably higher than smaller competitor ReneSola (NYSE: SOL), is in poor financial shape. This government financing mechanism certainly takes the edge off of those liquidity concerns. Hence the pop in shares on Monday.
As a capitalist, I suppose I should enjoy a game that's rigged in favor of a set of select firms. There's nothing like a nice oligopoly to lock in above-average returns on invested capital. That being said, I'm still reluctant to put my money behind LDK. In terms of running the company for per-share value creation, the track record to date is less than comforting.
