Suntech Power Updates: Debt Renegotiation And Circumventing E.U. Tariffs

Update On Debt Payment Issue: Suntech Power Holdings‘ (NYSE:STP) primary manufacturing subsidiary, Wuxi Suntech, was pushed into bankruptcy in China in March after it defaulted on a $541 million convertible note payment. While the firm reached a forbearance agreement with around 60% of its creditors to defer the payment date to May and renegotiated again to defer the date to June 28 as it continues talks, it faces a mounting legal threat from bondholders who were not party to the forbearance agreement. Earlier this month, a group of bondholders began legal proceedings against the company in New York to recoup their investment along with interest and other costs. ^[1]

Separately, the firm’s European subsidiary has been granted a definitive six-month moratorium on all its debt payment by judicial authorities in Switzerland. This is the second time the firm got an extension on repayment of its debt from European authorities.

Fire-sale Signals Desperation For Liquidity: While operations have largely continued as usual following Wuxi Suntech’s bankruptcy, there have been signs that the firm is desperate for cash. In May, the company agreed to sell a solar project in China along with significantly discounted solar panels to Shunfeng Photovoltaic International for around $15 million. The average panel price in the deal works out to around $0.49 per watt, which is almost 32% less than the $0.72 per watt market price as of May. ^[2]

Outsourcing Panels To Avoid E.U. Tariffs: Europe has been one of Suntech’s largest markets accounting for around 45% of total sales in 2011. The company has yet to release its final 2012 results. ((Suntech SEC Filings)) Like most other Chinese manufacturers, Suntech now faces anti-dumping duties (around 48.6%) on its modules in Europe. However, the company says that it has been able to outsource module components from outside China to avoid these duties. Although the company didn’t provide additional details, it said that tariff-free versions of all its standard modules including Wd mono, Wd poly and Ve poly will be available in the European markets. ^[3] While this would give Suntech an edge over other Chinese manufacturers in the European market, it might also drive up its costs and impact capacity utilization, resulting in lower margins.

Our Take: Investors seem to be cheering some of these developments, helping the stock recover from its lows of under $0.40 in March following the default and bankruptcy to current levels of around $1. However, we are sticking to our price estimate of around $0.21 for the stock, reflecting the firm’s deteriorating financial position, weak bargaining power as well as concerns around its ability to manage its debt load of over $2 billion. We believe the key catalysts for Suntech’s stock include the improvement in panel price realizations as well as the company’s ability to find a more permanent solution to restructure its debt rather than temporarily postpone payments.

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1. Small bondholders start court proceedings against Suntech Power Holdings , PV Tech [↩]
2. Bloomberg [↩]
3. PV Tech [↩]