New Hampshire, USA — In the latest twist in the solar industry’s consolidation saga, eight Chinese banks have petitioned the local courts to initiate insolvency and restructuring for Suntech Power Holdings’ main manufacturing subsidiary Wuxi Suntech Power Holdings Co., Ltd.. The company says it will not object the filing, which the court could accept within the next few days.
Suntech Power stresses that the parent company and other principal operating subsidiaries are not involved in these insolvency proceedings. Suntech Power has other cell and module production facilities at other subsidiaries in Wuxi, Shanghai, and Luoyang, so it says it will continue to meet customer orders.
Likely next steps, according to the company, are court-appointed administrators to implement restructuring, including negotiating with bank lenders and creditors. Wuxi Suntech will ask to continue operations during the process. Suntech separately has appointed Weiping Zhou, former chairman of Guolian Futures Co., as president and director, and appointed former China Everbright exec Philip Fan to its board. Guolian is part of Wuxi Guolian Development, a partially state-owned entity that has been speculated as the key to a local takeover of the Wuxi Suntech manufacturing business.
Suntech got an extension from a majority of its shareholders for its March 15 deadline to repay of $541 million in bonds — but not all of them. (Much of Suntech’s debt is held by Wall Street investment and hedge funds; having the insolvency filing done but not filed by the parent might raise questions about treatment of domestic vs. foreign investor interests.) As a result, the company has defaulted on the 3 percent convertible notes tied to that bond nonpayment, and admits it is “in discussions with certain of its suppliers and lenders relating to various other claims for non-payment or non-performance.”
The fallout from Suntech’s turmoil has extended to its U.S. operations, with the closure of its Arizona factory earlier this month. Also earlier this month, Suntech settled a year-long dispute with Global Solar Fund, which had promised, but never delivered, hundreds of millions of euros in German bonds as collateral for a loan.
We’ll be adding more to this story as it unfolds, adding various perspectives on what it means to China’s solar sector and the global supply & demand imbalance.
Lead image: Chinese pennies and Domino effect, via Shutterstock
UPDATED 3/22: We asked some industry watchers for their takes on what’s happened with Suntech, and what are some broader takeaway themes:
Who Gets Paid, And Warranty Woes
Maxim Group’s Aaron Chew points out that the Suntech story will soon turn ugly as investors scramble to claim assets, though it’s unclear how this will be untangled, with Chinese investors seemingly first in line and most of the bank debt likely to be collateralized with manufacturing assets which arguably won’t cover the value. And to remain in business even with the insolvency, Suntech still needs new capital now; the most likely assumption is Wuxi Golian will step in, pay off the Chinese bank debt, and “walk away with the company,” he said.
And with much of Suntech’s debt tied up in the US, this could open another rift in an already contentious solar trade dispute; “it could get really nasty politically,” Chew said.
Yet another angle in the Suntech insolvency is the issue of product warranty. “When companies fail, their warranties are typically worthless,” points out Paula Mints. “This is bad for the installers/system integrators as well as system owners — not to mention the health of the planet.” Jigar Shah, though, argues that downstream companies have learned to mitigate that risk with insurance, and in general it’s neither difficult nor prohibitively expensive to swap out one c-Si supplier for another; with only slight differences in power ratings and things like framing, “most investors don’t care” who the panel supplier is. Customers worried about warranties from China-based suppliers in general could look to minimize risks with panel suppliers having stronger balance sheets, such as SunPower and First Solar, suggests Satya Kumar from Deutsche Bank.
A Healthy Industry Whole
Suntech’s woes won’t really fix the industry’s bigger issue of overcapacity, which is several gigawatts, or tens of gigawatts depending on what’s being counted. If Suntech does get bailed out by the state, it’s to maintain the company operations as a module producer (and thousands of jobs), says Chew. Its 2-GW of capacity aren’t simply vanishing off the market.
“We do have more pain coming before the market rationalizes itself,” noted Shah. Suntech happened to be on the wrong end of aggressiveness in a downward cycle — as have been others, such as SolarWorld and REC, he noted. He thinks “it will take until the end of 2014 to rationalize the marketplace” and start seeing significant investment again.
Shah also strongly opposes the notion of a culling of solar companies for the “greater good” of rebalancing supply and demand: “The only ones [worried about this] are those who stand to lose from a manufacturing industry being weak,” he said. In Africa and Latin America, “people are desperate to buy more solar in a big way,” he explained. From that perspective, the solar industry is “doing so well that it’s shocking people.”
Mints counters that no market can be deemed “healthy” with some of its key participants suffering like this:
|MWp||Cell/Module Revenues||Net Loss/Income Full Revenues|
That’s the total of 12 of the top cell and module suppliers in 2012, ranked by MWp, and in US $M. Not a single one turned a net profit, and only 4 of 12 managed gross gains.
Consolidation: Painful and Necessary
“No one seems to get this: consolidation has no value in the solar industry,” Shah said. Companies will disappear, new ones will arise, and the industry will continue on. Bu if China *really* wanted consolidation, Shah pointed out, it would simply designate a winner, shower it with billions in support “and cut off everyone else.”
While acknowledging that “consolidation” will likely play out by the end of this year, Mints says it will also come at the cost of removing much innovation (read: people and ideas) needed to keep driving the industry. And consolidation, she points out, happens in every industry with failures, mergers/acquisitions, etc. and isn’t a sign of an industry’s overall health. In fact, “normal” market definitions would suggest that higher demand would actually drive prices up, instead of the relentless downward pressure, she points out.