What Are The Implications Of Suntech’s Failure To Make Its Bond Payment?

March 18th, 2013 by Trefis Team
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STP: Suntech Power Suntech Power each representing One Ordinary Share) logo
STP
Suntech Power Suntech Power each representing One Ordinary Share)

Quick Take

  • Suntech Power fails to make principal payment of $541 million of convertible notes due on March 15
  • Firm had signed forbearance pact with over 60% note holders to defer payment date by two months, but the failure to pay the remaining 40% potentially constitutes a default
  • Possible scenarios include a bailout or takeover by the Wuxi government, a bailout by central government or bankruptcy

Suntech Power (NYSE:STP) failed to make a required principal payment on the $541 million in convertible notes that matured on Friday, raising questions about the firm’s future. The firm had negotiated with 60% of the note holders to defer the payment date by two months. However, it was still required to pay the remaining 40% of the debt holders, and now having failed to do so, the firm has reportedly been served with a default notice from the trustee of the issue. [1] The consequences are likely to be severe for Suntech, as this allows it to be sued in U.S. courts and also raises concerns about its possible bankruptcy.

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Possible Scenarios And Implications For Shareholders

Even if Suntech is able to negotiate with its remaining bondholders (who haven’t signed the forbearance pact) to defer the payment date, we believe that it is unlikely that it can resolve this issue on its own, given its dismal financials. As of Q1 2012, total debt stood at over $2.2 billion while the equity position was just around $800 million (and it is likely to have deteriorated since). The firm’s cash flows have also been negative and its safe to assume they are not going to recover in the near term given the weak pricing environment in the solar industry. Here are our thoughts on the possible scenarios that could potentially play out.

Bailout/Acquisition By Wuxi Government (Likely in our view): There have been some reports citing that the government of Wuxi, where Suntech is headquartered could step in to help the firm. The New York Times reported that the firm could be taken over, either fully or partially, by the government of Wuxi, citing an unnamed official. The terms and the structure of any potential takeover were not disclosed. Suntech is known to have been in discussions with the Wuxi government for sometime now.

However, we believe that any bailout by the Wuxi government is likely to be squarely targeted at protecting jobs and the local economy. Equity holders are unlikely to see much benefit. If an equity injection were to occur to help Suntech pay off bondholders, common shareholders would see their stake in the company severely diluted since the firm’s current market cap is around $130 million while the face value of the bond issue is around four times as much at $541 million.

Filing For Bankruptcy (Moderately likely): Some of the firm’s bondholders have been demanding that the trustee of the bonds file for Suntech’s involuntary bankruptcy. [2] If the firm had to go into bankruptcy (either forced or on its own), it is likely that Chinese lenders will have priority claim over international bondholders. Shareholders on the other hand, wouldn’t be left with much if anything since the firm’s debt is more than 10 times its market cap.
Central Government Bailout (Less Likely): China’s cabinet took a strong stand last December against supporting failing solar companies saying that it would cut funding to them and would also encourage consolidation within the domestic solar space. However, Suntech is one of China’s largest solar firms. If it fails to replay international debt, it could hurt future debt issues in the solar sector and also in the broader Chinese industry. This could also potentially hurt China’s image as an investment destination. Considering this, there is a chance that the central government will step in to lend the funds, but since the maturity date on the bonds has passed, this is looking less likely in our view.

We will be watching the situation and our price estimate for Suntech could change materially based on the turn of events.

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Notes:
  1. Bloomberg [↩]
  2. WSJ [↩]