Suntech May Sell Italian Assets, LDK Defaults

Doug Young

A restructuring storm continues to blow through China’s battered solar sector, with word of a potential major asset sale by Suntech (NYSE: STP) and a debt default by LDK Solar (NYSE: LDK). Of these 2 news bits, the Suntech one is easily the most interesting as it finally helps to make sense of reports last week that billionaire investor Warren Buffett might want to buy the former solar superstar that last month declared bankruptcy. But Suntech investors will be disappointed to learn the latest reports don’t seem to include a major cash infusion from Buffett, who isn’t really known for investing in such troubled assets.All that said, let’s take a look at the latest Chinese media reports, which say that Suntech may be looking to sell its Italian assets as part of its bankruptcy restructuring. The main asset up for sale would be its 88 percent stake in GSF, a fund that was building solar plants in Italy mostly using Suntech-supplied solar panels. Some readers may recall that Suntech came under fire last year after disclosing its relationship with GSF, since it was using sales to the firm to inflate its own revenue figures.

But let’s move past that scandal to the latest reports, which say that Suntech could sell its stake in GSF to raise some badly needed cash. GSF has an enterprise value of up to $800 million, but Suntech’s stake would likely be worth far less than that amount since the solar plants that are GSF’s main assets were built when solar panels prices were sharply higher than their current levels. A Suntech spokesman said the company intends to operate GSF for now, though he did add that it will consider its options to maximize shareholder value.

So where does Warren Buffett come in to all this? Media reports have suggested that Buffett may actually be interested in purchasing Suntech’s GSF stake, most likely at a steep discount to GSF’s current value. Suntech’s battered shares briefly jumped last week after media reported rumors that Buffett was interested in buying Suntech’s core manufacturing assets in its hometown of Wuxi.

This latest report that Buffett would buy Suntech’s GSF stake makes much more sense than the earlier one last week. That’s because Buffett has a record of buying existing solar power plants, which is essentially what he would be getting by purchasing Suntech’s GSF stake. It’s easy to calculate the rate of return for such plants, since costs and revenue are all well known quantities. These latest media reports point out that Buffett is likely to ask for a steep discount for Suntech’s Italian assets if he really makes a bid, meaning Suntech isn’t likely to get anything close to the $700 million that the stake may officially be worth.

From Suntech let’s look quickly at LDK, which didn’t surprise anyone with its announcement this week that it has “partially” defaulted on payment for some of its convertible bonds due to lack of cash. (company announcement; English article) This current partial default was relatively minor, involving a $23 million payment that was due on April 15. But the media reports also point out that LDK has another $240 million in debt coming due in June, and that a default on that amount could well trigger the second bankruptcy for a major Chinese solar panel maker after Suntech.

LDK is trying desperately to sell off its assets to various state- and privately-owned entities to avoid Suntech’s fate. It does seem to be attracting some interest in those assets, which it is selling at sharp discounts. At the end of the day, perhaps it will avoid a bankruptcy through such asset sales. But when all is said and done, such sales are probably the same as a bankruptcy reorganization, since the “new” LDK is likely to be a fraction of its original size if it even continues to exist at all.

Bottom line: Suntech could sell its Italian assets to Warren Buffett at a big discount, while LDK could avoid bankruptcy by selling off most of its assets.

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.