Survival of Fittest in Green Energy Shows Workout: China Credit

February 24, 2014 by  
Filed under Green Energy News

A survival of the fittest struggle
is emerging as China’s renewable energy industry faces a record
$7.7 billion in bonds maturing this year.

Yields are declining on Xinjiang Goldwind Science
Technology Co. notes as the nation’s biggest turbine maker
raised profit forecasts, while shares of Trina Solar Ltd. (TSL) have
tripled in the past year as pollution curbs buoyed demand for
solar panels. By contrast, LDK Solar Co. is heading for a second
default on overseas debt this week, while Suntech Power Holdings
Co. filed for bankruptcy protection in U.S. courts.

“The weaker companies are being weeded out,” said Charles Yonts, a Hong Kong-based analyst at CLSA Asia-Pacific Markets.
“The government is going to pick the winners and could force
them to take the assets of the others.”

The shakeout in solar- and wind-power companies is testing
the resolve of Premier Li Keqiang, who needs to allow
consolidation to slow a buildup of debt in the economy estimated
by a state think tank to account for 215 percent of gross
domestic product. While the first default on an onshore bond has
yet to occur, there are signs that industries with overcapacity
including steel and shipbuilding are cracking under the weight
of rising borrowing costs.

Manufacturing, Yuan

Manufacturing in China contracted to the lowest level in
seven months in February, according to a preliminary Purchasing
’ Index by HSBC Holdings Plc. and Markit Economics. The
yuan fell 0.05 percent to 6.0950 per dollar as of 11:08 a.m. in
Shanghai today, the weakest level since November, after last
week posting the biggest five-day decline in two years,
according to China Foreign Exchange Trade System prices.

Solar-cell prices have started to recover after falling 70
percent since 2010 as an industrywide expansion of capacity
exceeded demand. All three leading wind developers increased
electricity sales in 2013, while the average spot price of
polysilicon, which is used in solar cells, climbed 21 percent in
the past year to $19.96 per kilogram on Feb. 10, according to
Bloomberg New Energy Finance. China’s renewable energy stocks
returned an average 86 percent last year, compared with a 15
percent decline in 2012.

Only three to five “leading” solar companies will remain
in China by 2017 and account for 80 percent of the market, Trina
Chairman Jifan Gao said in an interview last month. There are
now about a dozen companies with the capacity to produce more
than 1 gigawatt of cells a year. Trina, which returned to
profitability in the third quarter, last week said it has bought
a majority stake in solar-cell producer Hongyuan PV Science and

Acquisition Push

Successful clean-energy companies are starting to hear
“word from the Chinese government that, rather than building
capacity on a standalone basis, they should acquire smaller
companies,” said Angelo Zino, a New York-based analyst at SP
Capital IQ. “That’s how the government takes a foot off the
gas” while seeking to preserve jobs, he added.

The nation’s environmental degradation has made developing
clean energy more imperative, with worsening pollution forcing
Beijing to warn the elderly and children to stay indoors as
recently as Feb. 21. China has 16 of the world’s 20 most-polluted cities, according to World Bank estimates. Pollution is
the leading cause of social unrest in the country, Chen Jiping,
a former member of the Communist Party’s Committee of Political
and Legislative Affairs, said in 2013.

China plans to add 56.6 gigawatts of clean-energy capacity
this year, including 20 gigawatts of hydro, 18 of wind and at
least 10 of solar power, according to National Energy
Administration data studied by Bloomberg Industries Hong Kong-based senior utilities analyst Joseph Jacobelli.

Pollution Fight

While Premier Li’s efforts to transform the economy to a
consumer-driven model and clean up the environment have dried up
funding for steelmakers, coal companies and shipbuilders, the
government is unlikely to put the squeeze on renewable energy
companies, CLSA’s Yonts said.

“Given the backdrop of Beijing’s fight against pollution,
it’s impossible to conceive that they would suddenly yank out
the rug from beneath renewable-energy companies,” he said.
“But keeping them on life support forever is another thing, and
they’re not keen to do that.”

China’s renewable energy companies have to repay $7.7
billion of bonds this year, the most in Bloomberg data going
back to 2000. Such firms issued $8.1 billion of debt in 2013 and
a record $9.6 billion in 2012, data compiled by Bloomberg show.

LDK Solar

LDK Solar, once the world’s second-biggest maker of solar
wafers, signed a new agreement with note-holders this month to
extend a deal to delay payments initially scheduled for August
2013 by another 14 days to Feb. 27. It has to pay the principal
the next day. The company’s 10 percent notes tumbled to 27 yuan
on Feb. 21, compared with the 100 yuan issue price. LDK will
make an announcement on the issue next week, media director Peng
Shaomin said Feb. 21 when asked for comment.

Shanghai Chaori Solar Energy Science Technology Co.,
which averted default on an interest payment last year and had
just 618.7 million yuan cash as of September, will pay 898
million yuan of debt in March, according to Guotai Junan
Securities Co. Chaori may default on its 8.98 percent bonds
maturing in 2017, according to Xu Hanfei, a Shanghai-based
analyst at Guotai Junan.

Sinovel Wind Group Co.’s five-year notes, whose yield has
surged 419 basis points since 2012 to 10.9 percent today
according to exchange data, may be suspended from trading if it
reports a second year of losses, the company said last month.

Default Chances

The likelihood of Chaori defaulting is high as it has
become harder for the loss-making company to obtain bank loans
for interest payments, said Xu. The company’s debt-to-asset
ratio was 90.1 percent at the end of the third quarter,
according to a company financial report released Oct. 27.

“This year, banks’ risk management is stricter, so they
may not lend money to Chaori again,” he said. “The company
didn’t improve, and efficiency is still low.”

China needs to deleverage because total liabilities in the
economy reached 111.6 trillion yuan in 2012 and accounted for
215 percent of gross domestic product, Li Yang, vice president
of the Chinese Academy of Social Sciences government think tank,
wrote in an article in Shanghai Securities News in December.

There are signs that the government is allowing corporate
borrowing costs to rise as it seeks to slow expansion of
capacity. Money-market costs have surged, with the benchmark
three-month Shanghai Interbank Borrowing rate jumping to 5.59
percent on Feb. 21 from 3.89 percent in June 2013. The yield on
China’s 10-year government bonds has risen 96 basis points in
the past 12 months to 4.53 percent.

Quickening consolidation may be a solution, as the
renewable energy industry has demonstrated, SP Capital IQ’s
Zino said. The process “creates a healthier solar space that
allows the industry to stand alone. Policy makers have finally
got it right.”

To contact the reporter on this story:
Justina Lee in Taipei at

To contact the editors responsible for this story:
James Regan at;
Sandy Hendry at

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