How much longer can Suntech Power (NASDAQOTH:STPFQ) survive? The answer might be: until Friday.
On June 28, the company announced an extension of a forbearance agreement with a majority of creditors, who agreed to delay demanding payment for $541 million in debt the company owes them. The deadline to pay, restructure, or go bankrupt is this Friday.
We already know that Suntech's biggest subsidiary is bankrupt and working with Chinese banks to restructure, but there doesn't seem to be much progress and there may not be any value left for shareholders even if a deal is reached. The big question for investors is: Why are shares still traded? There's no indication that Suntech is still a viable company, it should be bankrupt after debt default, and we haven't heard anything about operations since the end of the fourth quarter.
A warning sign for Chinese solar
Balance sheets matter in solar, and Suntech is a prime example of why. As sale prices have fallen, there's been less margin per panel and billions of dollars in debt have strangled solar companies.
The next company that investors should question is LDK Solar (NASDAQOTH:LDKYQ), who just reported another terrible quarter. While strong Chinese solar manufacturers are reporting rising margins and a march toward profitability, LDK said sales fell 52% from a year ago to $114.7 million and gross margin was -46.9%. Net loss was $165.3 million, or $0.97 per share, which means that LDK lost $1.44 for every $1 in sales.
If that's not bad enough, debt stands at $2.5 billion and last quarter's interest payment was $58.9 million. There's no conceivable way to think the company will generate enough revenue or earnings to pay down debt in the future.
Keep in mind that LDK's struggles are on a backdrop of strengthening solar companies, especially in China. Trina Solar reported substantially higher shipments and revenue, JinkoSolar reported a profit, and Canadian Solar is moving toward a profit as well. LDK Solar is being left in the dust.
Quality is emerging in China
Suntech will either have to get a bailout or go bankrupt by the end of the week, and LDK Solar doesn't look like it has any prospects for survival. The downfall of these companies is their terrible balance sheets, which I highlighted in October two years ago. The next highly leveraged company to worry about is Yingli Green Energy (NYSE:YGE), who reports earnings later this week. Margins will be up, but I doubt a profit will be on the horizon simply because of billions of dollars in debt. That's too much for even a strong Chinese solar company -- which Suntech once was -- to survive. Stick with quality and companies turning a profit in the solar industry.