Suntech Power (NYSE: STP) is in a pickle that could lead to consequences as severe as an involuntary bankruptcy. On Monday, the company announced a forbearance agreement with lenders, essentially holding off payment on $541 million of bonds due on Friday. As more reports have emerged, it appears the forbearance agreement was only with 60% of bondholders and the other 40% want nothing to do with it.
Right now, it appears Suntech has no interest in paying bondholders on Friday and there's now speculation this could lead to lawsuits and even an involuntary bankruptcy. Bloomberg interviewed a hedge fund manager who said that the fund sees it as worthwhile to pursue a lawsuit if they aren't paid on Friday. But statements from law firm Wilmer Cutler Pickering Hale and Dorr LLP were even more telling. Bloomberg quotes partner James Millar as saying: "Every piece of information that I've looked at suggests that they will default on Friday." That's telling no matter what side you are on.
What is interesting with this debate is that the company could have converted bonds into stock if it would have alerted bondholders three days prior to maturity, which was yesterday. Since it didn't, it appears that the company will be forced to pay cash or wind up in court.
Implications across solar
Suntech is the news of the day but this has much wider impact on the solar industry than just one company. China's state-run banks haven't come to the rescue of Suntech even though it has billions of dollars of debt outstanding with them. China may finally be willing to let a few companies fail.
This is bad news for Yingli Green Energy (NYSE: YGE) and LDK Solar (NYSE: LDK), in particular. Yingli has $2 billion of net debt, and at last count LDK Solar had $3.3 billion of net debt, both unsustainable in any normal business environment. Will the government let them fail as well, taking multiple gigawatts out of the industry's overcapacity? Many companies hope so.
A Suntech failure would be good for everyone else
If Suntech goes down it would really be good for everyone else in the industry. Solar is oversupplied right now and Suntech would take 2 GW of that supply off the market. I think U.S. solar companies would benefit the most but there would be winners in China as well.
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. Trina Solar would also be able to fill in, and with a bigger brand name than JA or Jinko it could experience expanding margins.
Foolish bottom line
This is exactly what the solar industry needs, even if solar stocks aren't reacting that way today. Keep an eye on Suntech's developments over the next few days to see if it evades this somehow, or if bondholders try to force the company into bankruptcy. It'll be a fascinating fight to watch.