Monday, December 5, 2011

The rigged solar panel bond market in Shanghai

A somewhat obscure story hit the tape today that got lost in all the S&P downgrade watch hoopla. A company by the name of LDK Solar Co, a Chinese solar panel firm - yes one the firms that brought down Solyndra - did a 3-year bond issue in Shanghai. Previously the firm sold bonds in Singapore, but this time it had to settle for Shanghai, where the bond market is not very large. The reason is that its current bond in Singapore trades at 50 cents on the dollar - basically where a near-bankrupt company debt would trade. Yet it was able to sell bonds at par in Shanghai. In fact its current debt in Shanghai trades at a premium with a 7% yield.
Bloomberg: The 500 million-yuan ($79 million) sale of three-year notes tomorrow is part of a 3 billion-yuan program by the company to replace shorter-term liabilities. Traders are quoting Xinyu, south-central China-based LDK’s three-year debt at 5,000 yuan per 10,000 yuan bond in Singapore, yielding 49.5 percent, data compiled by Bloomberg show. The company’s 2012 yuan-denominated debt sold in China in October yields 7.08 percent.
The same credit, two different markets, and yields of 49.5% and 7.08? LDK is rapidly losing money due to the glutted solar panel market.  How is the 7.08% yield possible? The only explanation is the Shanghai market for these bonds is rigged. In other words the Chinese government is buying LDK bonds to provide support to its solar panel industry. Otherwise the firm would be out of business.
Bloomberg: “In any normal market economy these companies would hit the wall extremely fast,” John Hempton, founder and chief investment officer at Bronte Capital Management, a Sydney-based hedge fund, said in a phone interview yesterday, referring to Chinese companies. “They are shockingly cash-absorbing in a shockingly glutted industry and they are all shockingly indebted. The advantage that they have is they don’t go bust.”
The U.S. Commerce Department doesn't need to dig much further as it investigates unfair trade practices in the solar panel industry by China. The market is telling them where to look.  Of course one has to ask the question as to where does such a fine company trade outside of China.  The answer is surprising - everywhere.  Here are the listings and the ticker symbols from Reuters:

LDK.N New York Stock Exchange
LD41y.BE Berlin Stock Exchange
LD41y.D Dusseldorf Stock Exchange
LD41y.DE Xetra
LD41y.F Frankfurt Stock Exchange
LD41y.MU Munich Stock Exchange
LDK New York Consolidated
LDK.C Cincinatti Stock Exchange
LDK.MW Midwest Stock Exchange
LDK.PH Philadelphia Stock Exchange
LDK.W Chicago Board Options Exchange
LDK.Z BATS Stock Exchange
LDKN.MX Mexico Stock Exchange

This firm got debt financing from Singapore, equity financing from all over the world and has now gone back home to the only place that would give it money to to keep it afloat.
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