LDK converts analysis – 35% YTP less than a year to maturity
June 1, 2010
LDK has $400m of 4.75% convertible bonds with a put on 4/15/11 trading at 79 for a ytp of about 35%. I think this is an attractive yield. The company’s main problem is that it has too much short term debt ($980m) but my analysis shows that they should be able to take care of these through a combination of extending the loans, issuing new equity, and selling additional interest in their polysilicon plant.
The company has $384m cash (plus another $70m restricted), $980m of short term debt, $400m converts, and $450m of long term debt, for a total of $1.7B. This equates to a debt /equity ratio of 170%, which is too high. A better ratio would be to bring it down to 100%. To do this, the company could raise $300m in new equity and sell another 35% of its new poly plant for about $400m and push out $680m of short term debt. Given that the debt overhang is keeping a lid on the stock, the near term business environment is improving, and the financing markets are wide open (ESLR $1.20 stock just did a $175m convert), I think LDK takes steps to fix its capital structure sooner than later.
Ownership & structure
Xiaofeng Peng (CEO) owns 67% of the stock. LDK was incorporated in the Cayman Islands in May 2006 by Xiaofeng Peng to acquire Jiangxi LDK Solar from Suzhou Liuxin. In 2009, the company sold 15% of its Polysilicon project for $220m to Jiangxi ($1.5B implied value). Analysts said the company is looking to sell another 35% stake to reduce its ownership to 50%.
LDK is the holding company with two main divisions 1) LDK Silicon (polysilicon) 2) LDK Solar (Wafer, cell, module).
Bankers
LDK’s bankers are Agricultural Bank of China, Bank of China, China Development Bank, Export-Import Bank, Huarong Int’l, and several domestic Chinese banks. I could not find any detailed information on the loan terms.
Given that in early April 2010, China Development Bank gave Suntech Power STP a $7B credit line and Trina Solar TSL a $4B credit line, it appears that the Chinese Banks are very supportive of the solar industry, which is becoming a very important export market. I see no reason why China Development would not extend the loans to LDK. Xiaofeng Peng is a powerful figure in China and owns 67% of LDK.
By comparison, LDK had 2009 sales of $1B, STP had $1.7B, and TSL had $850M, so it would not be a stretch for the Chinese banks to extend maturities of $1B to LDK.
Recovery value (rough estimate)
In case LDK has to file for bankruptcy, I see the recovery value for the bonds at 25%. LDK’s polysilicon facility has a $1.275B value based on the recent transaction. The rest of LDK’s business is similar to that of ReneSola (SOL), which has a $1B enterprise value (LDK is about twice the size of SOL but I will be conservative). That gives a total value of $2.275B or $1.82B if discounted by 30%. That leaves $100m available to convert holders after paying the banks $1.43B and $290m for trade payables and admin costs. This is also assuming that the company burns through its existing cash.
Solar supply chain
The solar supply chain has 5 basic steps: 1) Polysilicon, 2)Wafers, 3) Cells, 4) Modules, 5) Systems. Solar begins with the manufacturer of polysilicon which are made into wafers, which are then processed into cells. The cells are grouped into an electric array, and assembled into weatherproof modules that can easily shipped and installed by specialized system integrators on site.
LDK began as a manufacturer of Wafers but has now also ramped up production of Polysilicon. LDK has 2.0 GW wafering capacity, the world’s largest (10.8% share), 6,000 MT (18,000 MT by end 2011) of polysilicon manufacturing capacity, and 600MW of module manufacturing capacity.
Currently, the bottleneck is in the Wafer part of the supply chain, which is LDK’s main business. This supply constraint is leading to better pricing for wafers, which greatly benefits LDK.
Properties
In the last two years, LDK has spent about $2B on capex to build out its plants, most of which are the low cost producers, so there is a lot of value in these properties.
15,000 MT polysilicon plant “Ma Hong”
3,000 MT polysilicon plant “Xia Cun”
2.0GW ingot, wafer and cell plant
Solar Cells – plans for 3Q10 start (240MW by end 2010)
LDK Solar Module – Nanchang plant, Suzhou plant (1.5 GW capacity expected end 2010)
50% JV with Q-cells for 42MW system
Pipeline projects : Systems in Italy, France, Germany, Spain
Solar industry
In 2009, the leaders were Germany 40%, Italy and Czech Republic (combined for 23%), Other Europe 10%, US 10%, Japan 8%, Rest of world (11%).
In Germany, there is a feed-in-tariff, which requires utilities to buy electricity from solar power generators at a high fixed price (20 year contracts). There will be a 15% cut to subsidies on July 1, 2010 so there is a fear that we may get a drop off in demand. However, many German projects are being pulled into 1H10 (to lock in better contracts) causing a surge in near term demand and capacity constraints in parts of the supply chain. Due to the constraints, some projects that are not related to German subsidies are being pushed into 2H2010. Combined with potential pull-ins into 2H2010 from 2011 from other counties whose subsidies get reduced on January 1, 2011, the order book for 2H 2010 is filling up quickly. There are many bears that think demand will fall off a cliff after July 1 but evidence is quickly contradicting that theory as some companies are now sold out through October 2010. As the near term environment improves, LDK will have more opportunities and flexibility to refinance its debts.
It is also possible that China could enact some kind of National feed in tariff (2010 or 2011), in which case the solar industry would benefit greatly.
Risks
1) A sharp downward move in the Euro. This could have be negative for demand in Europe.
2) A sharp rise in the Renminbi. This would be negative for LDK because it would make them less competitive with non-Chinese rivals.
3) Problems with their polysilicon facility in terms of production. SO far, all signs indicate that the new plant is running smoothly.
June 29, 2010
I spoke to Jack Lai, CFO of LDK today. These are the key points.
1) The company has $384m in cash but $980m in short term debt and $400m in converts due 4/2011. There is another $450m of long term debt. Jack says there is usually about $200m due every quarter. In the past, they have extended the loans every quarter. The loans are all from Chinese Banks who are very accommodating to extensions.
2) Jack is currently working with bankers on a potential IPO of its 85% owned poly silicon plant. Based on LDK’s sale of the initial 15% stake, the remaining 85% is valued at $1.275B. LDK would likely keep 50% and sell off another 35%.
3) Jack is aware that there are $400m converts due 4/2011. He expects the company to generate some free cash from now to the end of the year and he will use that to buy back some converts in 2010 before addressing the rest when it matures.
4) Jack says he is working on a credit line similar to what STP and TSL got. STP got a $7B credit line and TSL got $4B. Jack feels that he can get something similar.
5) Near term business is good. Germany is pulling forward business but 2H order book is filing up. They are sold out through October. Wafer pricing is 80c, firming.
August 16, 2010 -converts trade up to 91 following good report
LDK ended the quarter with $443m cash and free cash flow of $25m (cash flow from operations of $152m and capital expenditures of $127m). Wafer prices have been moving up given strong demand in solar that will probably continue to be strong at least through year end.
The company has $1.1B short term bank borrowings, $400m of converts, and $487m of long term borrowings. LDK’s plan is to continue to convert the short term loans into long term loans, which they have had no problems doing.
Given the cash on hand of $443m and now the company is FCF positive, I am more comfortable that LDK can take out the convert due 4/2011 fairly easily. It probably needs to raise about $200m to be in a good position.
LDK’s plan to raise cash is the following
1) They are in final staegs of discussions to expand its line of credit with state level institutions
2) The are negotiating with potential investors for a placement of common stock,
3) Look to provide a dividend to the holding company in cayman islands from the chinese operatiing company.
On the business side, wafer prices are going up in 3Q and 4Q. The spot market is not $1 per watt, higher than the 85c in the second quarter, Non silicon costs for the wafer busines sis 31c per watt, targeting 25c in six quarters.
They also see a big increase in poly prices and continuing to increase in the next few months. Currently, they see $60 but could go up to $80 or even $100 if demand continues to be strong. ABout 40% of LDK’s poly is going to the market and the rest being used in-house
September 16, 2010 – Converts trade up to 94.5
I spoke to Jack Lai, CFO of LDK about the converts due 4/1/11. He said the company is in negotiations to sell a stake in the poly plant for between $150m and $200m and that the deal should close within the next 30 days. LDK’s plan is to use this cash to buy back half the issue before the end of the year. The company then plans to retire the other half in early 2011 with the proceeds from a stock sale or other fund raising.
LDK currently has $443m in cash and $126m in short term pledged deposits. However, the company would like to keep this money at the company to finance potential future expansion. So to retire the convert, the company wants to raise new money.
On the business front, Jack says business is very strong for Q3 and visibility into Q4 is good as well. Contract pricing for wafers is about 85c for Q3 and Q4. This would likely drop by 10% in 1H2011. Spot pricing is higher at 90c to $1. (this is very good pricing)
The order book for Q1 is building in terms of volumes although pricing is not yet set. While most of the street is bracing for a drop off in 1Q, he says weakness in Germany is being replaces by strength in Japan, China, California, UK and France.
I believe that LDK is close to a fund raising deal and the converts, which trade at about 94, will move to the 97-98 range when a deal gets announced.
September 27, 2010 – Converts trade up to 97.5
LDK announced that it entered into a strategic financing agreement with China Development Bank for up to 60B RMB ($8.9B US) of credit facilities to LDK Solar over a year period. I spoke to Jack Lai, CFO, today and he confirmed that the company can use this credit line to retire the 4.625% converts and other short term debt. Jack sees the converts trading at 98 today and says he is looking to buy chunks of bonds (10-15m at a time) back in the open market opportunistically. He wants to cut down as much of the issue as possible. I would not rule out an early tender. Jack says he is watching the stock price and may look to sell equity if the price is right. He is also continuing to negotiate a sale of their poly plant and should be in a better bargaining position given the new Chinese credit facility.