Ambitious Sun King falls from grace
Suntech may be declared as soon as Monday to be in default on $US541 million ($520 million) in convertible bonds initially due last Friday. The company had secured agreement from 63 per cent of bondholders to delay payment for two months, but others have indicated they may sue the firm.
A trustee administering the bonds sent Suntech a notice of default at the end of last week, Bloomberg reported, a move that would allow bondholders to take the company to court in the US. A default, if declared, would be the first by a mainland Chinese company.
Suntech was founded by Dr Shi, who trained and worked at Sydney's University of NSW and took Australian citizenship before returning to China in 2001. The company, the first producer of solar panels to list on the New York stock exchange, soared in value to be worth $US16 billion at the end of 2007, making Dr Shi a multi-billionaire and earning him the sobriquet of the 'Sun King'. The shares have fallen more than 99 per cent from their highs.
Suntech has faced a slew of financial problems over the past year including possible fraud losses totalling more than $700 million. Senior management has been in turmoil, with Dr Shi stripped of his role as chief executive in August and then his chairmanship this month though he maintains the biggest share of Suntech at about 30 per cent. Dr Shi, who turns 50 on Monday, may see the entire value of his stock wiped out if the company is declared bankrupt.
Renate Egan, managing director for Suntech's Australian research and development unit, said Suntech - along with many of its rivals - exceeded ambitious growth targets.
"Suntech doubled every year for six or seven years and couldn't produce enough for the market," Dr Egan said. Employees went from 200 to 20,000 over that time.
Then the financial crisis struck in 2008-09, sapping credit for many of the buyers of solar PV just as supply had started to explode.
"Now supply far exceeds demand and everybody's competing on cost.
"It's an industry in its teenage years," Dr Egan said. "People expect a very static market for the next two years. It needs a few small [policy] changes and it will grow dramatically again."
Frequently Asked Questions about this Article…
Suntech Power is teetering on the edge of bankruptcy mainly because an industry-wide solar supply glut followed years of very rapid expansion. The company also faces a default risk on large convertible bonds and has suffered internal problems such as alleged fraud losses and senior management turmoil, all of which have contributed to its collapse.
Suntech may be declared in default on US$541 million (about $520 million) in convertible bonds that were initially due the previous Friday. The company won agreement from 63% of bondholders to delay payment for two months, but a trustee has sent a notice of default and some bondholders have indicated they may sue.
A declared default would allow bondholders to take legal action against Suntech in the US, because a trustee has already sent a notice of default. The article notes this could be the first default by a mainland Chinese company on such bonds if it is declared.
Suntech doubled in size every year for six or seven years, growing staff from about 200 to 20,000 and becoming one of the first solar panel producers listed on the NYSE. That aggressive expansion led to overcapacity when global supply exploded and demand fell, leaving the company unable to manage costs and sales effectively.
Beyond the supply-demand imbalance, Suntech has reported possible fraud losses of more than $700 million and significant senior management upheaval: founder Dr Shi Zhengrong was stripped of his CEO role in August and later his chairmanship, though he still held about 30% of the stock according to the article.
Suntech's shares plunged from highs reached when the company was valued at about US$16 billion at the end of 2007. According to the article, shares have fallen more than 99% from those peak levels.
The article quotes Suntech’s Australian R&D head saying the industry currently has supply far exceeding demand, with companies competing on cost. He described the solar sector as being in its 'teenage years' and suggested the market could remain fairly static for the next two years unless a few policy changes spur new growth.
The Suntech case highlights several investor risks: aggressive expansion can create overcapacity, a sudden credit squeeze (as happened in the 2008–09 financial crisis) can cut demand, alleged fraud or large write-downs can destroy value, and management upheaval can increase uncertainty. Everyday investors should be aware that these factors can wipe out equity value, as they did for Suntech.
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