Energy Business

LDK Solar, Mathematically Bankrupt Without China (LDK, YGE, STP, TSL, JASO)

Following the terrible earnings reports just out from a half-dozen of China’s largest solar PV makers, it is mathematically possible that at least one of these companies is at the edge of the bankruptcy precipice. LDK Solar Co. Ltd. (NYSE: LDK) is burning cash and the company’s outlook for the current quarter and the 2011 fiscal year are not encouraging.LDK Solar reported $636 million in cash and equivalents at the end of the second quarter.
At the end of the third quarter, cash and equivalents had fallen by $373 million, to $263 million. Short-term borrowings and payments due on long-term debt rose by $140 million, from $2.21 billion to $2.35 billion. The company also had negative cash flow for the quarter, with negative gross profit of $17 million and a loss from operations of $77 million.  Does any of this assure an imminent bankruptcy filing?  No.  This company is one which many consider as being “protected by China.”  Still, financial math is financial math.

Here’s what the CEO had to say in the earnings release: Weak market demand and rapidly declining average selling prices throughout the solar supply chain resulted in shipment volumes and revenues lower than what we previously anticipated. While we continue to believe that the significant opportunities to meet global energy needs with solar power will drive long-term market growth, in the near-term we expect challenging conditions in the solar industry to continue.  As such, we remain focused on strengthening our balance sheet, increasing our operating efficiencies and improving our cost structure.

How exactly does the company plan to strengthen its balance sheet? To increase its operating efficiency, it probably needs to fire people. That won’t go down well. Cutting production might not help either.  How it can improve its cost structure is equally mysterious, given that prices for solar modules continue to decline.

However the company does have a potential ace in the hole. Last September, LDK received a loan package worth $8.9 billion from China Development Bank (CDB) to be used for “long-term growth initiatives and corporate development plans.” LDK was one of several solar and wind-turbine makers to receive a total of $47 billion in what are essentially credit lines from the CDB. According to a recent report from Bloomberg, LDK has drawn on none of that line of credit, although solar makers Yingli Green Energy Holding Co. Ltd. (NYSE: YGE), Suntech Power Holdings Co. Ltd. (NYSE: STP), Trina Solar Ltd. (NYSE: TSL), JA Solar Holdings Co. Ltd. (NASDAQ: JASO), and wind-turbine maker Xinjiang Goldwind have drawn just $866 million to date.

Under the terms of the CDB’s credit lines, a company needs to apply for a loan for a specific project, and the intention when the lines were approved was certainly to grow manufacturing capacity. Interest rates were also high — more than 6.5% according to the Bloomberg report.

At one time, it might have been conceivable that LDK would apply for a loan for what are known as “general corporate purposes” to get it through this rough patch. But given the recent trade case filing against China’s solar makers by a group of US solar makers, if the CDB goes ahead with such a loan, the US solar makers would certainly scream and the US Trade Representative could easily rule in their favor.

China would probably like to avoid that in a perfect world and LDK could in theory be put in the position of taking one for the team. That is, the CDB and the government would let LDK fail just to show that there is nothing funny going on in the country’s solar industry. One possible way for China to dodge either an outright bailout or a bankruptcy of one of its showpiece companies would be to lend money to one of LDK’s competitors for the purpose of acquiring LDK. How or even if those funds would show up on the acquiring company’s balance sheet is anyone’s guess.

LDK’s market cap is currently around $400 million, long-term debt totals about $980 million, and shareholder equity is around $1.2 billion. Under any bankruptcy or reorganization scenario — except the improbable one of LDK pulling out of this mess on its own — shareholders would likely receive nothing.

We do want to stress one thing here and that is that with this being effectively under China it may not ever come about that the company is really forced to file for bankruptcy.  Many companies, even in America, manage to avoid filing for bankruptcy for years and years when they are mathematically bankrupt or insolvent.  Asensio used to blast LDK but we have not heard much from him of late.  Strange things happen in China, and solar “finances” do not avoid that characteristic.

Paul Ausick