Mainland China's First Default Raises Specter Of China's Credit Bubble Collapse
For the first time, a mainland Chinese company has defaulted on its bonds. SunTech Power Holdings has been clinging on by its teeth but after failing to repay $541mm of notes due on March 15th - and following four consecutive quarters of losses through the first quarter of 2012 and since then having failed to report quarterly earnings - owed to Chinese domestic lenders, the firm is restructuring. As Bloomberg reports, Chinese solar companies are struggling after taking on debt to expand supply, leading to a glut that forced down prices and squeezed profits - and most notably were unable to renegotiate its liabilities and obtain “additional flexibility” from creditors. This is highly unusual and perhaps is the beginning of a trend for Chinese firms. We already know the little discussed but gargantuan size of China's corporate bond market (which dwarves the US relative to GDP) as the mis-allocated credit tsunami of the last few years begins to hit its lending limit - just as Chinese corporate leverage is surging. If Suntech, the world’s largest solar-panel maker as recently as 2011, could not renegotiate its loans, we humbly suggest there are more problem firms out there about to find their friendly local banker a little less enthusiastic - just as Marc Faber warned recently.
STP's 168% rally of 'hope' all gone now...
Suntech Power Holdings Co. Ltd. (STP) became the first company from mainland China to default on its bonds after failing to repay $541 million of notes due March 15, breaching terms of other outstanding loans.
The move pushes what was once the world’s biggest solar panel maker into default on credit lines it has with International Finance Corp. and Chinese domestic lenders, Suntech said today in a statement from its headquarters in Wuxi. China Development Bank Corp (SDBZ). has loans to Suntech.
The move opens the way for Suntech noteholders to sue the company in the U.S., where its shares and bonds trade. Last week, Suntech obtained an agreement of holders of 63 percent of the notes to delay exercising their rights until May 15, allowing executives to press ahead with restructuring payments. Some noteholders not involved in those talks are organizing a rival group and have threatened to sue.
Suntech is seeking “a way forward that will take into account the rights and interests of all of its constituents, including shareholders, noteholders, lenders, customers, suppliers and employees,” Chief Executive Officer David King said in the statement. “We are currently exploring strategic alternatives with lenders and potential investors, which could help to set us on a path towards longer term success.”