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PDFTake Suntech’s massive sales to its majority-owned Global Solar Fund (GSF), for example, which have hung over the company like a dark cloud for almost a year. Thanks to those transactions, which accounted for almost one-third of Suntech’s quarterly revenue at the time, the Chinese company managed to satisfy Wall Street growth expectations and follow up with a secondary stock offering that prevented a potential liquidity crisis. Based on extensive research by TheStreetSweeper, however, Suntech apparently sold those solar products to itself and is still awaiting payment on 95% of the resulting revenue that it booked to this day.
Meanwhile, Suntech has remained curiously silent about yet another joint-venture deal that has brought no tangible rewards. In early 2009, Suntech cheered investors with news that Gemini Solar Development – a company it formed with a tainted Pink Sheet outfit – had landed a deal to create one of the largest solar power plants in the entire world.
That facility, ordered by Austin Energy in Texas, was supposed to begin operations by the end of this year. After announcing the deal with great fanfare last spring, however, Austin Energy no longer talks about the project at all.
Although Suntech predicted that it would soon triple U.S. solar sales when negotiating that deal, the company still depends on foreign countries with generous government subsidies for the vast majority of its business. Germany will soon cut the incentives that triggered most of Suntech’s past orders, however, while other European countries started backing away from similar incentives even before the recent credit crisis hit.
In fact, Hapoalim Securities recently cautioned, hard-hit Spain may soon adopt retroactive subsidy cuts that could threaten the entire industry.
“These programs are costing Spain billions of dollars each year and will continue to do so for the next 18 years,” Hapoalim wrote last week. “Given the dire straits of the Spanish economy, we believe that retroactively cutting incentives is almost imminent …
“If passed,” Hapoalim warned, “these retroactive cuts would set a new precedent regarding the constancy of European renewable subsidies, thus resetting the level of perceived risk in renewable energy investment.”
Suntech cannot rely on its home country of China to make up the difference, either. Although China signaled plans for massive solar subsidies last April – lighting a fire beneath Suntech and other solar stocks – the government quickly reversed course, media reports show, and has since targeted solar energy as an overheated sector that should be reigned in through tighter financing rules instead.
For its part, Hapoalim doubted those Chinese subsidies from the start. A week after the news first surfaced, Hapoalim rushed to temper the market’s enthusiasm with a report announcing that the Chinese government itself was questioning the validity of the subsidy announcement.
“We believe the recent run-up in the solar stocks has been based on exaggerated, unfounded assumptions on demand … in China this year,” Hapoalim wrote at the time. Meanwhile, “we expect Chinese solar companies to take advantage of this run-up with equity offerings over the coming weeks given the distressed state of their balance sheets.”
Although Hapoalim mentioned several solar companies that might try to raise capital, the research house placed Suntech – saddled with looming debt obligations that it could not afford to pay – at the top of that list. The very next month, its quarterly results boosted with generous help from related-party deals with GSF, Suntech raised $277 million through a secondary offering that spared the company from potential doom.
Suntech did not respond to questions for this story.
Dark Secrets
After booking so much revenue from GSF – a gigantic, new customer that seemed to burst out of nowhere – Suntech understandably fielded multiple questions about the mysterious firm.
When pressed during its first-quarter conference call last year, Suntech admitted that the company itself owned 86% of GSF but insisted that outsiders actually managed the firm’s operations. When asked to identify GSF’s other investors, however, Suntech offered no further clues.
“We are not in a position to comment on other investors,” Suntech CEO Zhengrong Shi stated at the time. But “GSF is not managed by Suntech at all. It’s managed independently. We are just a limited partner.”
As it turns out, Shi – of all people – should have been equipped to answer that simple question. After all, Suntech’s regulatory filings would later show, Shi himself controls a firm that owns another 10.7% of GSF. Moreover, if TheStreetSweeper’s exhaustive research proves correct, yet another Suntech insider may own the remaining 3.3% of GSF and act as the so-called “independent” managing director of the firm.
In the section of its 2009 proxy statement covering related party transactions, Suntech identifies Javier Romero as the managing director charged with overseeing GSF and its day-to-day operations. Interestingly, in a conference bulletin for an industry trade show held last spring (around the same time that Suntech negotiated its big sales to GSF), one of the presenters – with the name Javier Romero – specifically identified himself as the president of Suntech Spain.
When contacted by TheStreetSweeper, Suntech Spain confirmed that Romero works there and oversees all marketing activities for the division. (TheStreetSweeper left two messages for Romero at Suntech Spain, but he never returned those calls.) TheStreetSweeper then called another phone number listed in corporate documents for Suntech Power in Spain, and the receptionist there identified the business reached as GSF itself.
The connections don’t end there, either. During that uncomfortable conference call last year, Suntech claimed that the solar modules it sold to GSF went to “investee” companies that were themselves managed by “independent” leaders who aggressively pursue good deals.
Despite an extensive search of corporation documents, however, TheStreetSweeper could locate records for only one “investee” company connected to GSF: an outfit known as Solar Puglia. That firm officially filed incorporation papers on April 28, 2009 – four weeks after Suntech’s first quarter came to an end but three weeks before the company actually posted its results (including $100 million worth of sales to GSF) for that same period. Notably, Solar Puglia lists none other than Javier Romero as the sole owner of the firm.
From there, the complex maze continues and winds back towards GSF and Suntech itself. According to corporation records, Solar Puglia capitalized itself with all of the assets held by yet another company called Energetica Wing. At the end of 2008, those records show, Energetica listed assets worth just 531,000 Euros – with only 3.2% of that in cash – on its balance sheet. Although Energetica merged with several obscure firms as the first quarter of 2009 drew to a close, records indicate, the company still seemed ill-equipped to be placing massive orders with Suntech.
“Energetica Wing was hardly a company one would expect to have had the financial wherewithal to handle a $100 million order in early 2009,” one Suntech critic stated. “It seems rather remarkable that this newly formed entity could have put together a business plan, obtained contractors and arranged project financing in the final three business days of March 2009 to justify the single largest sale in Suntech’s history.”
Nevertheless, in its recent annual report, Suntech has identified Energetica as one of its largest international customers overall. Indeed, only three companies – all of them German firms capitalizing on subsidies that face imminent cuts – rank higher on that list than does Energetica itself.
Austin Uplugged?
As noted earlier, Suntech has stopped talking about its big solar project here in the U.S. in the meantime.
To some, Suntech’s eerie silence on the matter speaks volumes. To many, however, past reports about Suntech’s partner may say even more.
Together with Suntech, MMA Renewable Ventures – a division of penny-stock company Municipal Mortgage & Equity (MMAB.PK), or “MuniMae” – formed Gemini Solar Development in the fall of 2008. At the time, MuniMae was struggling to overcome a history of financial restatements and allegations by investors that the company had engaged in securities fraud. (MuniMae’s stock, which fetched more than $20 until 2008, now trades for just 24 cents a share.) Through Gemini, the company aimed to pursue new opportunities in the solar industry.
Kristina Peterson, a Suntech insider tapped to serve as CEO of Gemini, said the two partners shared “the same vision about how the U.S. solar market will develop and grow” when introducing the new company. Just weeks after forging that partnership, however, MMA Renewable Ventures CEO Matt Cheney was already warning about dark clouds ahead. Specifically, in October of 2008, Cheney told Reuters that solar customers with “mid-level credit ratings” – which were strong enough to secure loans just six months earlier – could no longer expect easy financing going forward.
“You can’t justify that at the committee of the financial institutions,” Cheney stated in the article. “So it is just not going to happen.”
Nevertheless, in the months that followed, Gemini pushed forward with its own big plans. The company aggressively pursued the giant solar project in Austin and, last March, officially announced that it had landed the deal. Just days before releasing that news, however, MMA inked a deal to sell itself so that its parent could exit the solar business and focus on rebuilding the rest of the company instead.
“Because of the difficulty raising capital in the current market environment, our renewable energy production has been decreasing,” MuniMae CEO Michael Falcone explained when announcing the deal. “The capital needs of the business, coupled with our need to address corporate liquidity concerns, make this a prudent time to sell this business.”
Even with Spanish solar giant Fotowatio replacing MMA as Suntech’s partner, Gemini has apparently faced challenges financing the Austin Energy plant. In September, a banker told an industry trade publication that Gemini was still hunting for lenders to supply $150 million worth of funds under a proposal that was “not just a plain vanilla financing” sort of deal.
Since then, even Austin Energy has stopped talking about the project. When TheStreetSweeper called last week for an update, the big utility declined to comment and referred all questions to Gemini instead. Gemini did not respond to a phone message seeking input for this story.
Crossed Wires
Meanwhile, Suntech keeps extending the projected date for GSF to secure the financing necessary to cover the projects already on its books.
Originally, Suntech predicted that it would begin to receive those funds during the second quarter of last year. When that deadline passed, Suntech established new ones that fell closer to the end of the year instead. Since then, however, the Italian government has adopted a tougher stand on solar plants in Puglia – the region identified by Suntech as the location for its GSF projects – that threatens to derail those deals altogether.
Under Italian law, McDermott Will & Emery noted in a legal report this spring, solar companies can utilize a simplified approval process only for small plants designed to generate no more than 20 kilowatts of electricity. Despite that restriction, the law firm explained, Puglia “autonomously” decided to raise its own limit and became a hotbed for solar development as a result. The Italian Constitutional Court recently declared Puglia’s relaxed measures illegitimate, the law firm said, halting fast-track approval of similar projects and creating legal risks for even those that have already been approved.
With Suntech’s deals with GSF calling for 42 megawatts of solar power – more than 200 times the limit established for speedy government approval – the company could face potential risks. If Suntech joined other solar companies in the rush for fast-track approval, experts say, the company could find it even more difficult to locate bankers willing to finance those projects.
Project Finance, an industry trade publication, was already warning of that threat even before the Italian court issued its definitive ruling.
“Seven banks have gone through credit committee approval and are now waiting the outcome of the Constitutional Court hearing,” Project Finance wrote in an article about the GSF deals back in December. “If the court ruled the provisions non-compliant with central authorization procedure, the project could be pulled.”
Meanwhile, Suntech remains stuck with massive unpaid bills related to that project. Of the $115.8 million worth of revenue booked for GSF deals last year, $110.2 million still shows up as an outstanding receivable on the company’s balance sheet. Thus, even after raising capital with help from that controversial transaction, Suntech remains on shaky financial ground.
Suntech’s recent annual report exposes lingering threats. Although Suntech lists a total of $958 million in cash and restricted cash on its balance sheet, experts note, the company has since used $221 million of that to pay down the convertible debt that posed such a big liquidity risk a year ago. Even with that convertible debt drawn down, experts say, the company still lists more than $1.2 billion worth of outstanding debt – with $800 million of that showing up as “short-term borrowings.”
Despite this “negative cash” position, experts say, the picture could have looked even worse. Suntech’s accounts payable jumped from $118 million to $264 million last year, they note, with almost half of that increase coming in the fourth quarter alone. Moreover, they say, Suntech generated $179 million of its cash by “factoring” receivables (selling accounts at a discount to an outside collector) instead of pocketing the full amount itself. Otherwise, they add, Suntech’s “days sales outstanding” – boosted by unpaid bills from major customers – would be much higher than they currently appear.
Clearly, Suntech cannot afford a major hit to its balance sheet right now. Last fall, in fact, FBR Capital Markets analyst Mehdi Hosseini was already asking, “Doesn’t negative $3 net cash per share matter” to those investing in the company? Since then, other analysts have gone on to fret over a potential write-down of the big GSF receivable in particular.
For its part, Suntech has repeatedly tried to calm those fears. During its third-quarter conference call in November, Suntech assured analysts – multiple times – that the company remained highly confident that it would collect those GSF receivables by the end of the year and saw no real threat of a potential write-down.
In fact, when the questions persisted, Suntech’s CEO even went a step further. Despite the secrets since uncovered by TheStreetSweeper, Shi clearly suggested that the company had nothing to hide.
With “the accounting issue related to GSF, we have been quite transparent about it,” Shi declared back in November. “So,” he famously concluded, “I think there shouldn’t be any hidden issues here.”
* To contact Melissa Davis, the author of this story, please send an email to editor@thestreetsweeper.org.
