Chaori Solar Energy defaults its Bond Payments

Shanghai Chaori Solar Energy has officially defaulted on its domestic bond payments after the company could not come up with the money to make a $14 million payment. Note many of the Tier 2 and Tier 3 solar panel makers in China are in deep trouble after a painful two years of downturn. While the low cost Tier 1 makers such as Jinko Solar (JKS) and Trina Solar (TSL) have made a spectacular comeback posting profits and increasing revenues, smaller Chinese solar manufacturers are grappling with liquidity issues and high debt problems. These companies have high cost and small scale without effective distribution in a global market. The massive overinvestment in solar capacity during 2010 led to many companies entering the field, with little competency or expertise. Most of these companies are in a moribound state and are effectively bankrupt.

Shanghai Chaori is one of the biggest solar bankruptcies after USA listed Suntech (STP) and LDK Solar (LDK) defaulted on their international dollar bonds. These two companies have been imploding over the course of the last couple of years. Even as the better Chinese solar panel producers such as Canadian Solar (CSIQ) and Jinko (JKS) have been giving multibagger returns, these two have been trading for less than a dollar. Chaori is another solar company that is unlikely to survive and its most likely outcome is that its assets will be sold to a bigger solar company. Trina, Yingli and Jinko have recently been buying solar manufacturing assets for a cheap price, as Tier 2 makers look to exit the industry. Chinese solar companies created 50 GW of capacity most of which is lying idle. With demand returning, cash constrained Chinese Tier 1 makers have been making use of this idle capacity as they look to keep capex in control.

Chaori’s bankruptcy has also pointed to the broader macro debt problem in China. The Chinese government encouraged banks to go on a lending spree post the Lehman crisis. A massive amount of debt has been created most of which is going bad as it went to finance overinvestment in industries such as mining, steel, solar , LEDs, shipbuilding, finance etc. The overall bond yields in China surged post Chaori’s default as a sudden wave of risk aversion hit Chinese bond investors. Note Chinese government have always bailed out bankrupt companies and this is the first time that a company has been allowed to go bankrupt. In 2012 the local government had persuaded the local bank to roll over Chaori’s loans. No luck this time, as the government did not come to the rescue. Suntech and LDK have also faced similar treatment in the past. Chinese solar companies will now increasingly have to face the world alone without the backstop of the Chinese government. It is a good move in my view as it will eliminate the weak hands and allow the stronger companies to thrive.

WSJ

A Chinese solar company facing the country’s first bond default said that, for now, it wouldn’t receive a local-government bailout and reiterated it can repay only a tiny fraction of the interest on debt issued two years ago.

Liu Tielong, board secretary of Shanghai Chaori Solar Energy Science & Technology Co., told The Wall Street Journal on Thursday that the Shanghai government “hasn’t promised anything and is treating our debt crisis according to market rules.”

The company plans to pay four million yuan ($654,000) of the 89.8 million yuan ($14.6 million) in interest owed on its one billion yuan bond Friday.