Suntech woes: the inside story

Following earlier posts on the possibility of a Suntech takeover by GCL Poly and the fraud case that has plagued them, New York based Aaron Chew from Maxim has revealed some more background.

Chew, a senior solar power analyst, has investigated the nitty-gritty behind the unravelling story; and it reads like an exciting and ever evolving crime thriller.

Literally.

Although the full details may take years to come out, right now, it's not all bad news however. Importantly, Chew noted that the “risks seem to have fallen” as a result of Suntech reigning in account receivable- significantly. From a high of US$112M in 3Q 2009, AR's dropped to US$19M in 4Q 2011.

He also noted comments from internal and legal documents that confirm, “The legal actions are not against the company” (Suntech).

That's good, but will it be enough to save them? Let's face it no one wants to see a solar success story go down, and Suntech had been (still could be?) a shining star in the solar world; but the machinations of Chinese politics, international law and such sizeable financial issues, let alone some of the (allegedly) unscrupulous folks involved, is one almighty lesson.

Although a different world of scale, we have seen solar become an increasingly popular target for get-rich-quick types even here in Australia.

Here's what Chew said.

On takeover prospects:

“With Suntech on the hook with the Central Development Bank for about $700 million of fraudulent collateral – and insufficient cash or cash flow to cover it net of the $541 million debt due March 2013 – we believe that the Chinese government is likely on the verge of a recapitalisation or nationalisation of STP (Suntech Power).”

“With STP unlikely to monetize GSF to repay its $700 million CDB debt and little cash net of its $541 million Mar. 2013 maturity, we believe it is months away from a massive recapitalisation/nationalisation”.

On the fraud case:

“Criminal charges filed over 5 MW of GSF Projects in Southern Italy Court: In the culmination of an investigation STP disclosed in its 2010 20-F, Brindisi in Puglia filed criminal charges against five project LLCs for circumventing permitting by disguising a 5-MW park as five projects <1 MW. Each of these LLCs are subsidiaries of Global Solar Fund [GSF], STP's off-balance sheet project development arm of which it owns 86 per cent (and general partner Javier Romero 14 per cent). Set to begin December 6, 2012, the trial could last as long as four years.”

“Liabilities, claims, and fraud likely ensure GSF assets are unrecoverable: If proven guilty, the plants will be seized, as the law invariably requires they be dismantled or handed over to the municipality. Though this trial represents 5 MW (or about $20 million) in assets, an additional 15 MW is being investigated in Brindisi alone. Moreover, we suspect the rest of GSF's 143 MW portfolio followed a similar script up Puglia's coast, while our contacts in Italy confirm that others are only half built and not operating. Given the potential liabilities/claims from (1) fraud/ plant seizures, (2) some of the LLCs' association with the local mafia, and (3) the €560 million of fraudulent collateral, GSF's assets are likely now toxic to most buyers.” 

“Fraudulent collateral likely puts STP and Dr Shi in hot water with China: While criminal charges may grab headlines, the much larger transgression, in our view, is the fake €560 million bonds GSF provided to CDB as collateral in what can arguably be considered the largest fraud in China business history. While we believe the finger has implicitly been pointed at Mr Romero, we believe the CDB may question how STP's younger ex-sales agent from Spain could conceivably come up with €560 million. In turn, though STP has remained mum on the subject, we believe it more likely the CDB may hold ex-CEO Dr Shi at fault, perhaps playing a bigger hand in his stepping down as CEO than his desire to focus on technology.”

In its “Global Solar Fund S.C.A., SICAR Notes to the Financial Statements,” Note 16, Pages FF-19-20, Suntech Power Holdings described the following background:

“On March 21 2011, 5 solar parks representing 2.83 MW and belonging to Ecopower S.r.l., Girasole S.r.l., Photos S.r.l., MT2007 S.r.l. and Geos S.r.l. have been object of an investigation by the Court of Brindisi in relation to some potential irregularities concerning the relevant permits.

The tribunal argues that the land has been divided in smaller portions to avoid the AU (Permit to construct the solar plant that needs all public institutions full approval), and apply for the DIA (Permit to construct the solar plant obtainable through a simpler procedure).

The legal actions are not against the company but the previous developers from whom the company acquired the authorisations.

According to the company understanding, the dispute will have a positive ending as the power plants have passed positive legal due diligences from three international law firms and our lawyers do not have noticed any irregularities. The general partner considers such risk remote, in any case, should the charges be confirmed by the tribunal, the general partner considers that the economic potential impact of a negative sentence would be approximately €9 600 000.

However, should a negative decision by the Court of Brindisi materialise, the company will seek indemnification from the developers.”

Let's hope this almighty mess can be untangled and Suntech can return to its position as a sound top five player in solar.

Nigel Morris is the Director of Solar Business Services.

This article was originally published by SolarBusinessServices. Republished with permission.