Bottom line: YIngli’s debt restructuring plan and ReneSola’s early debt repurchase will bring some confidence to solar shares, but pessimism will quickly return as their situations deteriorate without major signals of new government support.
Shares of Yingli (NYSE: YGE) and ReneSola (NYSE: SOL) have taken investors on a wild ride these last few weeks, reflecting the alternating hopes and fears gripping 2 of the shakiest companies in a solar sector crippled by a downturn now entering its fourth year. If I were a betting man, I would say the chances are better than 80 percent that Yingli won’t survive the crisis, especially after the company’s latest announcement that it will miss a debt repayment deadline. Chances for ReneSola look slightly better, but even then I would only put the company’s likelihood of survival at 50-50.
One of the biggest questions fueling the uncertainty is whether Beijing and local governments will step in to rescue these companies. A year ago the answer would almost certainly have been “no”, reflecting China’s desire to clean up a bloated sector plagued with excess capacity. Recent signals show Beijing may still want to let the weakest players fail, but also that China’s slowing economy may be weakening that resolve.
The latest signals appear to still show that Beijing still wants to see consolidation, even though that could cost China’s economy thousands of jobs and other economic activity. One of those signals came from Yingli, which said that one of its subsidiaries would miss repayment of $157 million for notes that are coming due on October 13. (company announcement; English article; Chinese article)
But just a day later, a more positive signal came from ReneSola, which said it had begun to buy back notes that were set to come due as soon as next year. (company announcement) Last but not least, media also reported that another mid-sized player, Jinko Solar (NYSE: JKS) was indefinitely delaying plans to build a new plant in Brazil, again pointing to the shaky finances that are now undermining many companies. (English article)
Looking for Cash
The YIngli news is certainly the most worrisome, and will see the company’s Tianwei Yingli subsidiary miss a deadline to repay 5-year notes coming due on October 13. But Yingli held out hope that it could eventually repay the debt, saying it expects to receive $138 million from the sale of land and demolition of some older facilities. That could cover most of the payment if and when it receives the money, which could happen before the end of the year.
This particular move reflects Yingli’s ongoing woes, but also the weakening resolve of local governments that looked set to allow the failure of poorly performing solar panel makers. That’s because the buyer of Yingli’s land is almost certainly a local government entity, which means the sale would be almost the equivalent of a government rescue.
Next there’s ReneSola, which announced it recently repurchased more than half of about $50 million in convertible notes that will come due in 2018 but have a put option next year. ReneSola also said it has repurchased around 800,000 of its American Depositary Shares (ADSs), as part of a $20 million share buy-back program announced on September 23.
Both of these moves are clearly confidence-building measures despite the small amounts of money involved, and they did provide some support to the broader sector. ReneSola shares jumped about 20 percent after its latest announcement, though they still trade below their levels from early September. Even Yingli stock, which tumbled 20 percent after its earlier debt restructuring announcement, returned to pre-announcement levels.
Finally there was the Jinko Solar news, which looked downbeat as the company indefinitely shelved plans to build a factory in Brazil. That plan was part of a growing wave of new outbound investment announced earlier in the year, which appeared to show the sector might be returning to health. (previous post) But turmoil in the global economy may now put many of those expansion plans on hold.
At the end of the day, all of this news points to the same reality, namely that many Chinese solar companies are struggling and will face closure without government support. Yingli’s bailout shows such support may come in limited amounts for now. But I expect government patience will be short-lived, and we will ultimately see YIngli and one or two other larger players fail.
Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.