Suntech: Shinier Days Ahead?

Doug Young

With only a week before a key deadline for a big debt repayment, solar panel maker Suntech (NYSE: STP) appears to have cleared a major hurdle for a rescue plan by settling a big dispute with one of its major partners. I suspect that settlement with GSF, a builder of solar plants in Europe, was a major condition by Suntech’s bondholders for a deal that could see the company avoid both bankruptcy or a takeover by Chinese government entities. In the meantime, Suntech’s colorful founder Shi Zhengrong is speaking freely to the media about his forceful ouster earlier this week from the chairmanship of his company, in an ongoing series of power plays taking place behind the scene.

All this may sound quite complicated, but the story really comes down to a battle between Shi and Beijing. Shi desperately wants to remain at his loss-making, debt-laden company which has more than $500 million in bonds that will mature next Friday, March 15. Beijing is offering funds for a potential bailout, but only if Shi leaves the company.

In the latest development of this fast-developing saga, Suntech announced it has reached a settlement with GSF, an affiliated company that was buying Suntech’s panels to build solar electricity plants in Europe. (company announcement) The dispute with GSF began last year and is a bit complex, involving GSF’s failure to deliver millions of dollars worth of bonds that it had promised to give Suntech to use as collateral for a loan.

Terms of the settlement will see Suntech increase its stake in GSF to 88.15 percent from a previous 79.3 percent. But more important than the terms is the fact that Suntech has settled the matter, which was most likely a key condition for the renegotiation of Suntech’s $541 million in bonds that will mature in a week. If that’s the case, look for developments to come quickly in this deal, as Shi tries to reach a settlement with the bondholders that will allow him to stay at his company and avoid having to take a bailout from Beijing.

Such a deal would almost certainly force Shi to give most or all of the 60 percent of Suntech he currently owns to bondholders. That stake was worth billions of dollars just 2 years ago before the solar panel sector plunged into a major downturn due to a massive supply glut. But now the stake is worth just $132 million based on Suntech’s latest market capitalization, which includes a 4.3 percent rally for its shares after it announced the GSF settlement.

Meantime, let’s take a quick look at the latest media reports that show just how bitter and dirty the behind-the-scenes battle at Suntech has become as its reckoning day approaches. According to a report in the China Daily, Shi, who lost his CEO position last summer, said he was excluded from all meetings at the company over the past month before finally being kicked out of the chairman’s job earlier this week. (previous post)

Shi added that he was “shocked” by his ouster, and called the move unlawful. This latest settlement with GSF would seem to indicate that perhaps Shi still wields some influence in the company, and that he may be able to craft a rescue plan that would avoid a government takeover. But even if he avoids a government bailout, Shi will most likely have to give most of his Suntech shares to bondholders, who will almost certainly also insist that he step aside and let more experienced executives come in to turn the company around.

Bottom line: Suntech’s settlement of a dispute with a business partner could pave the way for renegotiation of a major bond that will mature next week.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.