Where are we at Suntech?

Suntech isn’t who we think it is The company known as Suntech isn’t simply Suntech at all. It’s a group of 41 different holding companies, intermediate holding companies, and operating subsidiaries tied together by common ownership. Suntech Power Holdings Company Ltd., based in the Cayman Islands, is the parent company, the ultimate owner, directly or indirectly, of all the others. Wuxi Suntech Power Company Ltd., in the Peoples Republic of China, controls the most important operating subsidiaries. Each company in the Suntech group is a separate legal entity with its own assets and liabilities. Suntech Power Holdings’ biggest assets are its shares of three intermediate holding companies; its biggest liability is $585 million in debt held by U.S. investors and the World Bank. Wuxi Suntech’s subsidiaries own most of the plant, equipment, and inventory and generate nearly all of the cash flow; its biggest liability is $1.7 billion in debt held by Chinese banks. Structural subordination Suntech’s legal complexity is more than just an opportunity for lawyers; it’s also a problem for Suntech Power Holdings’ bondholders. Even though their bonds are senior under the terms of their own indentures, they are junior to Wuxi Suntech’s bank loans. That’s because of something called structural subordination. Structural subordination occurs when a holding company borrows money at the same time as an operating subsidiary does. Suntech Power Holdings relied on cash from Wuxi Suntech for debt service, but Wuxi Suntech had its own debt payments to make to the banks. By forcing Wuxi Suntech into bankruptcy, the banks blocked payments from Wuxi Suntech to Suntech Power Holdings and to the bondholders. Mount...

Outage at Suntech

Here comes the sun In 2008, the clouds of pollution that clot the skies over China’s cities had officials there gasping for relief. They were even more troubled by the slowdown in China’s economy. Their solution was to promote solar energy, not only for clean energy production but also for exports and jobs. The government backed the solar panel industry with massive lending programs from state-controlled banks. China’s solar module manufacturing capacity grew from less than 5 gigawatts in 2007 to just under 40 gigawatts in 2011, more than double the total in the rest of the world, and far in excess of demand. The market for solar modules was only 5 gigawatts in China and 30 gigawatts globally. The result was a collapse in panel prices worldwide. Suntech’s power fails For Suntech, China’s largest solar panel maker, prices fell from $3.72 per watt in 2007 to $1.51 per watt in 2011. In terms of volume, Suntech’s sales were strong, with sales in megawatts of generating power up 34% in 2011. But low prices coupled with above-market, take-or-pay supply contracts for raw materials short-circuited profits. Adjusted for special charges like asset impairments, operating profits were negative in 2011 and the first quarter of 2012. Suntech’s free cash flow was negative in most years because of heavy investments in working capital and in plant and equipment. The company was able to offset operating losses with working capital efficiencies, and cash flow from operating activities went from ($30) million in 2010 to $93 million in 2011. But capital spending proved harder to cut; it actually increased from $276 million in 2010...