China’s solar bonds leave dim hope of payback

March 13, 2013

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Dim prospects for payback await bondholders in China’s Suntech Power Holdings. The stricken solar panel maker, unlikely to meet a $541 million bond payment due on March 15, has persuaded over half its foreign creditors to hold off for two months. On purely financial grounds, it’s hard to see how the bondholders could come away with anything in the event of a default. What value remains is a bet that China values foreign investors too much to snub them outright.

Following the plunge in the price of solar panels, it would take a brave white knight to bail Suntech out. Panels sell for around 70 cents per watt of generation power, compared with Suntech’s targeted manufacturing costs of around 75 cents per watt. Prices would need to increase substantially for the company, whose debts exceeded its net asset value when it last reported earnings in May 2012, to generate a positive return on capital.

That looks unlikely given chronic oversupply. Global capacity is around 50 gigawatts, according to consultancy IHS, most of it in China. That compares with likely global demand in 2013 of 35 gigawatts. Potential European duties on Chinese panels cloud the picture further. The best hope is that China may quadruple its own installed capacity by 2015 – but that would probably only absorb excess supply rather than push up prices.

Even if a bailout emerges, foreign bondholders are at the back of the queue. Local governments and banks – one of whom is suing Suntech already – may be loath to provide rescue funding only to see it leach to foreign creditors. Worse, the bonds, which were issued by a foreign holding company, have no actual claim on Suntech’s assets, and rank below all other creditors in a default.

In that light, the bonds’ trading price of 36 cents on the dollar on March 11 looks optimistic. Perhaps holders think China’s authorities will stop short of throwing them under the bus, for fear of losing access to foreign capital. China still needs money to build projects from real estate to railways, and its own bond markets are undeveloped. It doesn’t justify the current price, but may be enough to ensure Suntech doesn’t pull the plug entirely.

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