2012-08-09

Chinese steel magnate flees debt; solar industry headed for bankruptcy

Only one week ago I wrote in Capital fleeing China; China must float the yuan and slash taxes:
Get ready for more stories of fleeing businessmen who shut down their companies overnight.

Now we have the first story:

Tangshan steel mill owner flees debt of ¥1 billion 河北唐山民营钢企老板被疑跑路 欠款或超十亿元
Chen Zhiqiang, chairman of two privately run steel companies in Hebei and Xinjiang, is suspected of fleeing with over 1 billion yuan still outstanding to creditors of Baoqiang Steel Co. and Xinjiang Jifeng Iron & Steel Co. Two months ago Chen won an award for being an "outstanding private entrepreneur with integrity," but now owes 300 million yuan in private loans and 700 million yuan in bank loans. A Baoqiang Steel creditor said that "a factory in Xinjiang had its funding cut off and Chen Zhiqiang was unable to repay his bank loans, causing him to go into hiding."
H/T Caixin.

The Baoshan Steel Index broke 900 last week and has continued to slide. The last time the index was this low was in 2009, but output is far greater in 2012. That paves the way for far greater losses and even more bankruptcy.

The steel sector isn't alone. Solar may also be headed for bankruptcy, another victim of a central government push to increase output.

Sun Setting on China's Solar Sector
In the face of a new government coming to power October 2012-March 2013 and the capital hole facing the solar industry, we believe support at the provincial level—where it has been most prevalent—is at risk. Historical support may have been underpinned by banks' refusal to take losses, but we believe the tables will turn as banks balk at new investment in an industry suffering from steady cash burn and the need for massive future capital investment.

Even as bankruptcy law exists in China, we believe the dynamics of China's command economy make this a less-viable option. While the collapse in profits and cash flow may leave some with no other option than failure, we believe the most viable solution may be recapitalizations, in which banks swap debt for equity, enabling: 1) banks to creatively avoid a write-down; 2) companies to eliminate interest expenses; and 3) provinces to maintain employment. The trade-off, though, is equity dilution that destroys value for current shareholders.

With debt of $3.4 billion translating into a bloated 7.4 times net debt-to-equity, LDK Solar (ticker: LDK) might be considered insolvent by traditional measures at Western banks. While Jiangxi province's support has held firm, a free-cash-flow drain of $1.2 billion in 2011 and the need for further capital investment long term to maintain share leave it with few ways out.
The report goes on to list Suntech (STP) as at risk for bankruptcy or recapitalization.

The macro effect of recapitalization will be overcapacity and deflation. Solar makers around the world will face a new bankruptcy threat as Chinese firms wipe out their debts and maintain production.

Also:
“A gross margin of 4.5 percent indicates a loss, for sure, in the second quarter,” said Meng Xiangan, vice chairman of the Chinese Renewable Energy Institute.

According to Meng, gross margins for China’s ten leading photovoltaic makers were all below 10 percent in the first quarter, led by Canadian Solar, who earned a gross margin of 7.7 percent but still reported a loss of around 20 million U.S. dollars.

What’s worse, cash flows in Chinese solar makers are even tighter as many have rolled their debts over to 120 to 180 days, according to investment firm Helix Investment Management.
These companies can no longer obtain long-term financing.

Speaking of deflation, China continues to disinflate: China's CPI growth slows to 1.8 pct in July

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