Wednesday, May 22, 2013

Suntech - Were the U.S.-Listed Chinese Companies Just a "Bust Out"? ($STP)

You must read this astonishing research note - “Jobs Transformation Scheme" [pdf] - with a brilliant hypothesis regarding the real purpose of having Chinese solar manufacturing capacity nominally "owned" by U.S.-listed holding companies.

"What the Chinese have effectively done with all of its Chinese PV manufactures companies listed in the USA, is tapping western investors for funds.

The funds have been used to build factories in China, and thereby creating jobs in China. The Chinese have overextended the capacity in the industry by expanding the Chinese PV manufactures production facilities with western investors’ funds. Instead of cutting down the capacity of the Chinese PV manufactures, in order to stabilize the market, they kept expanding the production facilities.

After the crazy overextension of capacity, the Chinese began dumping (selling below cost) Chinese PV modules in the USA and Europe. This has lead to western competitors going out of business, as the whole industry experienced and still experience negative gross margins. More western competitors will go out of business, as there are only a few PV manufactures in the western world, with deep enough pockets, to survive this oversupply and overcapacity in the solar industry. This is obviously good for the Chinese economy as it keeps and creates jobs in China by using and burning foreign investors’ money.

This scheme is bad for the foreign economies, as their investors’ money goes into China and gets burned. The dumping of PV modules also kills the foreign economies companies in the PV manufacturing industry, and thereby transferring jobs and investments from foreign economies into China.

It’s no surprise that this dumping of PV module by the listed Chinese PV manufactures is unsustainable. The Chinese government has figured that out. What they have done in order to deal with that is, removing the seniority from the debt owned by foreign investor and adding even more leverage to the Chinese PV manufactures balance sheets. But the leverage added by the Chinese state owned banks has the highest degree of seniority this time because its provided as senior secured loans to the company’s subsidiary with all of the operating assets, combined with domestic lenders always have a higher degree of seniority than foreign investors in China.

What happens when the companies can’t pay back their foreign investors, is, that the default on the debt to foreign investors triggers cross defaults on all of thecompany’s debt. When that happens the Chinese state owned banks gets the assets of the subsidiary that they have provided the loans to.

Because the Chinese state owned banks have provided loans to the Company’s subsidiary and not to the listed holding company, the Chinese state owned banks get the assets of the company before the foreign investors are getting paid. When it’s the foreign investors turn to claim the assets of the company, there are simply nothing left but papers indicating the company is a company.

The “winners” of this scheme are the Chinese economy and Chinese workers, as jobs are transferred from the West to China, using western investors money. The “losers” in this scheme are: Foreign investors (equity and debt) who bought the Chinese PV manufactures green energy story, and the foreign economies as their companies are getting crushed in the competition, which leads to higher unemployment in the foreign economies."

The beauty of this hypothesis is its explanatory power. It has the potential to answer so many questions that were heretofore unanswered about how the Suntech story has played out:
  • Why raise money in the U.S. at all? Did they really want foreigners to own their new energy industry?
  • Why use the convoluted Cayman Islands/British Virgin Islands holding company and Chinese operating company structure? PetroChina trades in New York (PTR) in addition to Shanghai and is just a Chinese joint stock company. Besides subordinating the holding company notes to the Chinese banks, was this designed to confuse the issue and make the dispossession of the western creditors easier to accomplish? Or too complicated to be intelligently discussed by western media?
  • Why have the holding company issue bonds not guaranteed by the subsidiaries, but instead have the holding company guarantee the subsidiary bank loans?
  • Why did the subsidiary/operating company file for bankruptcy in China but not the holding company? 
  • Why was the company allowed (by the Chinese government) to run this way - meaning things like the GSF subsidiary? (Was that just for dumping product into the Italian market?) 
  • According to the Kent Ji shareholder derivative lawsuit (3:12-cv-06409-JST) against Shi et al, in 2007 Shi began "hollowing out Suntech by transferring its cash to, and using its employees for the benefit of, Asia Silicon Qinghai". If that's true, why would Shi do that given that he was the largest holder of holding company equity (then trading ~$30) that appeared to have a prosperous future? Did he know that the holding company really had no future? Is that why Suntech did not disclose that Shi was a cofounder of Asia Silicon?
  • Why has the Suntech holding company just gone dark? Why doesn't the company report on material events such as this or this? Should that be taken as just more evidence that the holding company has no future?
  • Why isn't the Chinese media reporting in detail on the Wuxi insolvency proceedings? Have the Chinese assets been transferred to state control already? Is there an order by the government not to report on the current disposition of those assets?
  • Why has the Chinese government tried to create the impression of a government guarantee without actually offering one?
If this theory is correct, then right now the Chinese government is stringing the bondholders along in order to let them down gradually. This theory would mean that there will be no bailout and no value in any of the subsidiaries.


John said...

Thanks CP for posting this...its interesting and makes sense. Never understood why the Chinese govt would bail out US investors.

Commenter on Seeking Alpha who lives near the company says Suntech's good assets have been transferred to Wuxi govt.

John said...

According to Caixin article, 75% of bondholders would have to approve bankruptcy for it to be implemented.
Does anyone know if this is correct?

CP said...

Wow! I guess with the media blackouts in China that could've happened already and no one would know.

Keep in mind there is a difference between Chinese bankruptcy procedures governing the Wuxi subsidiary (which is already in them) and the CI holding company (which is not.)

Walter said...
This comment has been removed by the author.
Walter said...

Interesting theory. Basically saying the Chinese aren't stupid, they are that devious. Haha. I wouldn't put it past them.

To summarize: they wanted to go BK in China first to take all their assets, meanwhile the holding co asks for forbearance, so that by the time the holding co declares BK, all the Chinese assets are long gone. Is that correct? And if it's true that the assets have already been transferred, the holding co is free to declare BK now...

Robohogs said...

This is all a bit much as all the US-invested had similar or worse structures. This is simply the semiconductor story yet again. I presume SPWR and FSLR will buy lots of bk assets themselves.

Siegel said...

CP, I've been reading your blog for a few months - really enjoy it - but not commented yet. I have been following the bankruptcy of ECD and was alerted to this:

may be worth reading the complaint.

CP said...

Wow! Thanks.

I'll get on ECF later and download the complaint, probably make a post out of it.

Suntech has so many legal problems now. Goodness.

Anonymous said...