Clean-Energy Defaults Seen Amid Record Debt Loads: China Credit

Sep 04, 2014 9:22 pm ET

Sept. 5 (Bloomberg) -- President Xi Jinping’s clean-energy strategy is suffering more growing pains as China’s renewables companies face record bond repayments and Sinovel Wind Group Co. said it may struggle to meet obligations.

The industry must repay $4.6 billion of notes in the second half, up from $3.5 billion in the previous six months, data compiled by Bloomberg show. Turbine-maker Sinovel Wind plans to buy back some securities at a price 24 percent lower than par value, and would face huge pressure if investors exercise sale options on the bonds in December before their 2016 maturity, according to an Aug. 29 filing.

The fight for survival in the solar and wind industries, where overcapacity has weighed on earnings, is mounting after Xi said in June China should boost alternative-energy supply amid worsening smog. LDK Solar Co., which defaulted on a note in February and has debt exceeding capital, faces a 500 million yuan ($81 million) repayment in three months. Baoding Tianwei Group Co., whose unit’s note was suspended from trading in March due to losses, must repay 1 billion yuan in December 2015.

“Default risks in the clean energy industry are high as it faces overcapacity problems and high debt redemption,” said Li Ning, a bond analyst in Shanghai at Haitong Securities Co., the nation’s second-biggest brokerage. “The buyback plan shows Sinovel may not be able to repay when investors chose to sell bonds back to the issuer in December.”

First Default

An official in the media department at Sinovel, who asked not to be identified citing company policy, declined to comment when reached by phone and asked for questions by e-mail. There was no immediately reply to the e-mailed queries.

China’s first default in its onshore corporate bond market was from the green-energy industry, when Shanghai Chaori Solar Energy Science & Technology Co. failed to fully pay interest on a bond in March. The solar-panel maker has lost the ability to conduct restructuring and return to profit on its own and needs financial aid from some investors, its administrator said in a Sept. 2 stock exchange statement.

Sinovel’s short-term borrowings declined to zero as of June 30 from 659.93 million yuan at the beginning of this year after the company repaid bank loans, it said in a separate statement released on Aug. 29.

Sudden changes in such figures could indicate that banks called in a loan to a company that appeared to be headed for default, according to Sun Binbin, a bond analyst at China Merchants Securities Co.

Overcapacity Industry

“Withdrawal of lending would suggest that the problem a company is facing is severe,” said Sun in Shanghai. “We will probably see more clean-energy companies with redundant capacity running into problems.”

Authorities are trying to cut manufacturing scope in green- energy industries after overproduction caused equipment prices to tumble. Shang Fulin, Chairman of China Banking Regulatory Commission, said in March that it will seek to limit lending that worsens overcapacity. The wind-turbine and solar-power industries face “relatively large pressure” from excessive production ability, the State Council said last year.

While steps to reverse the solar glut globally mean executives are now bracing for the first shortfall since 2006, the scarcity would benefit the biggest manufacturers including Yingli Green Energy Holdings Co. and Trina Solar Ltd.

Debt Burdens

Eleven out of 32 publicly traded alternative energy companies have a debt-to-equity ratio exceeding 100 percent, according to the most recent data compiled by Bloomberg, compared with 10 in 2007. LDK’s total debt of $2.78 billion- equivalent as of Sept. 30 last year exceeded its cash and equivalents of $95 million, Bloomberg-compiled data show.

China passed the biggest changes to its environmental protection laws in 25 years in April, outlining plans to punish polluters more severely. Even so, President Xi isn’t planning to attend this month’s United Nations summit on climate change, according to two UN diplomats, requesting not to be identified discussing the leaders’ plans. China, the world’s top greenhouse-gas emitter, has resisted sharp cuts in its output.

Xinjiang Goldwind Science & Technology Co., China’s biggest wind turbine supplier, said on Aug. 22 its first-half profit more than tripled as it increased margins and won orders for new wind farms. The company has 3 billion yuan of 6.63 percent securities that mature in February. The yield on the 2015 bond has dropped three basis points this quarter to 5.13 percent, according to exchange data.

Default Risks

“After the collapse of many weaker companies, the clean- technology industry is recovering,” said Yang Kun, a bond analyst in Shanghai at Guotai Junan Securities Co., the nation’s third-biggest brokerage. “Sinovel’s default risks are rising, but may not be big enough to lead to an actual default.”

Sinovel said it will use as much as 700 million yuan to purchase some of the 2.6 billion yuan notes maturing in December 2016, according to an exchange statement on Aug. 29. Debt holders will be limited to selling 500,000 yuan in principal under the program, or 10 percent of their total holdings, the statement said. The plan is subject to approval at a meeting of bondholders.

“Sinovel may use only 20 to 30 percent of capacity this year, while the average for the whole wind-turbine industry is about 60 percent,” said Zhou Yiyi, a Shanghai-based analyst from Bloomberg New Energy Finance.

Rising Costs

The company’s notes were suspended from trade on April 30 after it reported losses widened almost sixfold. The yield on the 6 percent securities was 11.5 percent before the suspension.

Higher borrowing costs in the industry come as yields for top-rated debt edge higher. The yield on AAA company notes due in 10 years has risen 18 basis points to 5.69 percent since June 30. The yield on similar-maturity government securities increased 20 basis points to 4.26 percent. The yuan has rallied 0.3 percent to 6.1386 per dollar in the second half.

“We are avoiding clean energy companies,” said Qiu Xinhong, a fund manager in Guangzhou at Golden Eagle Asset Management Co., which oversees about 11.3 billion yuan. “It’s still not a good time to buy given the high default risks.”