We've been covering Suntech's spiral into bankruptcy as the firm looks to transform into a state owned entity. Meanwhile, Shyam Mehta, GTM Research solar analyst, offers some observations:
- Ramifications for Suntech: On one hand, the Suntech bankruptcy is an unprecedented event: it is the first company based in mainland China to default on public debt, and the first established Chinese solar firm to enter into insolvency. However, at the same time, all signs point to the city of Wuxi taking over Suntech's Wuxi-based manufacturing subsidiary through one of its holding companies, meaning that Suntech is likely to continue operations as a solar manufacturer.
- Wuxi's Stake: The insolvency proceedings are to be expected because the city of Wuxi has no incentive to pay back Suntech's bondholders or other creditors or salvage any value for Suntech's shareholders. Its only motivation is to maintain the jobs created in Wuxi by Suntech's manufacturing operations.
- Chinese Solar Bailouts: If Wuxi does indeed take over Suntech's manufacturing operations as expected, it will serve as yet another case of a near-insolvent Chinese solar firm being bailed out by its local government, following in the footsteps of LDK Solar (Xinyu), Shanghai Chaori Solar (Fengxian) and CNPV Solar (Dongying). As time goes by and the balance sheets of other Chinese solar firms continue to deteriorate, we are likely to see this pattern repeated again and again, whether Beijing approves of it or not. City and district governments will likely do all they can to help their solar companies continue operating and maintain their workforces.
- Consolidation in Name Alone: As regards the fact that eight Chinese banks filed a petition for insolvency against Suntech, which is what triggered the event, the superficial reading is that Beijing and higher-level state lenders are willing to allow even established Chinese solar companies to fail to allow much-needed consolidation in China to occur. However, as surmised above, it is likely that Suntech will continue operating, effectively as a Wuxi-owned company, which undermines that notion. For consolidation to occur, we have to see firms actually exiting the market or merging/acquiring other firms. Otherwise, the situation will not change.
- Winners and Losers: At the end of the day, Suntech's entry into insolvency makes central lenders and Beijing look good in the eyes of the world since it seems to show they are willing to play by free-market rules, but the thing is that petitioning for insolvency is actually what effectively absolves Suntech of its obligations to bond and stock holders, paves the way for state takeover, and gives these eight banks a shot at eventually getting paid back. Looked at from that angle, Wuxi benefits, the state lenders benefit, Suntech benefits -- but Western bondholders and shareholders, having poured hundreds of millions of dollars of debt and equity into the company, are left with nothing. It serves as a cautionary tale for Western investment/loans to Chinese companies in general.