Banks Cool on Solar, Beijing Steps In

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Doug Young

A few of the latest headlines reflect a cooling appetite by banks for funding solar energy related projects, creating a worrisome vacuum that Beijing may need to fill as it seeks to stop struggling sector from sinking further still. Two of the latest such headlines look like particular cause for worry, with Canadian Solar (Nasdaq: CSIQ) taking over financial responsibility for a solar power project from one of its construction partners for unspecified reasons that I suspect are related to waning interest by banks in funding such projects. (company announcement) Another similar recent domestic media report says that a Chinese company that insures solar panel sales has just made its biggest-ever payment to JA Solar (Nasdaq: JASO) after the panel maker couldn’t collect payment from one of its overseas customers. (Chinese article)

Both of these pieces of news seem to point to the fact that banks are quickly losing their appetite for funding new solar power plant construction outside China. That could lead to a rapid slowdown in the building of new projects and create even more headaches for the already oversupplied sector.

Meantime, I would be remiss not to mention the latest news from the largely insolvent LDK Solar (NYSE: LDK), whose state-led bailout and takeover has taken another step forward with the “sale” of one of its most problematic assets to what appears to be a state-run entity. (company announcement)

Let’s start off this solar round-up with a look at the latest overseas-related news that may point to rapidly evaporating financing for new solar power projects in the key North American and European markets. One report has Canadian Solar, one of China’s leading solar panel makers, announcing it has purchased 2 solar power projects being built in Canada by MEMC Electronic Materials‘ (NYSE:WFR) SunEdison division for about $38 million.

This kind of relationship has become commonplace in the sector over the last few years, with panel makers like Canadian Solar often working closely with plant builders like SunEdison to construct new projects. In these cases, the plant constructor like SunEdison obtains financing for the project, then builds the plant with panels supplied by its partner, in this case Canadian Solar. When the project is complete, the panel supplier would then typically help the constructor find a long-term buyer for the project.

But in this case, SunEdison has apparently sold the 2 projects back to Canadian Solar midway through the construction process rather than waiting for the projects to be complete, putting an unwelcome new financial burden on Canadian Solar. It’s hard to know what led to this development, but I suspect that SunEdison was having trouble financing the deal, possibly due to waning interest from its local lenders.

Moving on to the JA Solar case, Chinese media are saying an insurer recently paid the company a record $5 million in compensation after an overseas buyer failed to pay for panels that it received from JA. The report doesn’t contain any detail on who the buyer was or why the reason for the default, but it does point out that the market has taken a strongly negative turn recently for Chinese companies that insure overseas panel sales.

Lastly, let’s take a quick look at LDK, which announced the sale of its LDK Anhui unit to a Shanghai-based company that I suspect is state owned and acting on government orders. The buyer, Shanghai Qianjiang Group, is buying LDK Anhui for 25 million yuan, even though LDK Anhui has negative net assets of $54 million, and had $485 million in outstanding bank loans.

The sale will help improve LDK’s own balance sheet by relieving it of this problematic asset, as the company is slowly rescued by Beijing through this kind of state-led assistance that will ultimately see the company taken over by the government. Look for LDK’s state-led bailout to continue and similar deals to follow for other panel makers, with cooling interest from foreign banks in financing solar sector projects only increasing the industry’s reliance on funding from Beijing.

Bottom line: New developments indicate foreign banks may be losing their appetite for financing the struggling solar energy sector, putting an even greater onus on Beijing to bail out the industry.

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.


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