It's been a little over a month since Suntech Power (NYSE: STP) refused to pay bondholders the money they were owed, which eventually left the company's Chinese operations in insolvency. The company isn't quite bankrupt yet, but all indications are that it's headed that way, because even Chinese banks want to liquidate operations.
Today, LDK Solar (NYSE: LDK), which is the second largest maker of solar wafers, said it has "partially defaulted" on $23.8 million in bonds due yesterday. The company negotiated a settlement with holders of $16.6 million of the bond and is "ready and willing" to discuss a settlement with the others.
Keep this in mind: If LDK doesn't have enough cash to pay $23.8 million in loans, how could it ever repay the $3.1 billion in debt on its balance sheet? It doesn't look good for LDK Solar.
A step closer to the edge
The way LDK Solar is playing out right now is similar to what happened to Suntech Power last month. Suntech originally said 60% of bondholders agreed to a delay in payment, but the other bondholders didn't, and Chinese banks that were also owed money took the Chinese subsidiary into insolvency.
LDK's situation looks eerily similar. The company isn't bankrupt, but it did default on debt. This could lead other debtholders, primarily Chinese state-run banks, to determine the company is insolvent and eventually force LDK Solar into bankruptcy.
The market's reaction
Surprisingly, the market has had a very sane response to LDK's news today. The stock ended the day down 3.5%, but the rest of the industry is up. That's what should happen, because a bankruptcy by LDK Solar would take supply out of the market and slightly reduce pricing pressure from other solar manufacturers.
The potential insolvency or bankruptcy of LDK Solar highlights exactly why investors need to be in high-quality solar names such as SunPower (NASDAQ:SPWR) or First Solar (NASDAQ:FSLR). SunPower has the highest efficiency product in the industry and is expanding margins, while First Solar leads in the utility space and has the best balance sheet. These are the only two companies in solar worth buying right now.