STP - Suntech Power

[T-bone1]

A friend of mine has pointed out a massive misvaluation in the public markets.  As usual, there are strings attached, but I would welcome commentary from the board on this opportunity.

 

Suntech is completely insolvent and has $541 million in defaulted bonds that are past due.  These bonds trade at 27 cents on the dollar ($145 million market value).  60% of the bond-holders have agreed to give the company more time to work things out, but the rest are free to force the company into bankruptcy, and one sued for recovery yesterday.

 

The amazing this is that the company still has a market cap of $180 million dollars. This is definitely a zero at some point in the near future, but I am not a BK lawyer and would be interested to hear thoughts on how this plays out.

 

I've attached a write-up from my friend, which explains the opportunity in more detail.  If anyone has any thoughts on this opportunity, I am all ears!

 

Cheers

 

Disclosure: I own a few puts on this, and will likely buy more.

Suntech_STP_-_Post_Default_Short_Idea_Writeup_-_06_04_13.pdf

[Olmsted]

T-bone,

 

Good writeup.  I assume this is the same Trondheim that I just read this morning is suing to get paid?

 

http://www.bloomberg.com/news/2013-06-11/suntech-power-sued-by-investor-trondheim-seeking-550-000.html

 

I don't understand what games these bondholders are playing with these forebearance agreements.  Seems they are just delaying the inevitable, but to what end?  I can't figure it out.  Something fishy is going on between the Wuxi banks, the operating subs, and the parent.  One theory is that the whole solar industry in China is a massive scheme to use western capital to build an industry, then steal the industry for local owners when they inevitably default on all western debt.  Actually seems plausible.

 

A blogger who has been all over this situation for a while is http://www.creditbubblestocks.com/

 

Here are the bonds in question.  Basically, if you see the stock price go up without a corresponding move towards par in the bonds, the thesis is intact:

 

http://cxa.gtm.idmanagedsolutions.com/finra/BondCenter/BondDetail.aspx?ID=ODY4MDBDQUU0

 

I have owned puts off and on with this name.  Playing with the houses money now, so to speak.  The stock will go to 0, no question about it.  The biggest risk is just how long it will take to get there, and how high idiot traders can push it in the meantime.  One reason it may still be at $1 is it is still part of solar etfs since the parent has not declared bk yet and it has not been de-listed.  Once it declares and is out of those etfs, then it is curtains for this one.  But how long will bondholders delay the inevitable?

[T-bone1]

Thanks Olmstead, I can't take credit for the write-up though.

 

I had also wondered how much of the buying/owning is from ETFs rather than dumb retail, but it seems like an awfully large market cap.

 

My understanding is that the bondholders who have granted forbearance are Chinese, so they are just waiting for a potential bailout of some sort (for them, not shareholders!)

 

I generally avoid stuff like this because I don't want to short a penny stock and I don't like being at the mercy of timing with puts, but it would seem to me that American bondholders suing for repayment will put an end to the game.  I see one of two scenarios:

 

1) Within 60-90 days this thing will be in BK and the stock will be close to zero

 

2) If this isn't in BK within 60-90 days, the small bondholder who sued will get a preferential claim in an eventual bankruptcy and can start seizing US collateral

 

Given that scenario #2 would put this bondholder at a huge advantage over the other 40% of non-Chinese bondholders, I expect the other non-Chinese holders to also sue in short order and cause scenario #1 to play out.  If other non-Chinese holders continue to do nothing, it is basically negligent and a dereliction of their duty to the ultimate owners of the bonds.

 

Would love to hear advice on this from any lawyers on the board!

 

Cheers

 

 

[T-bone1]

A friend sent a lot more information.  It sounds like the bonds are probably worthless along with the stock, but it also looks like this will play out one way or another within 90 days:

 

Here's two interesting references about the interface between judgment liens and bankruptcy.

“The creation of a lien is the transsubstantial moment at which a plaintiff’s in personam right graduates into a right in rem. At this point, the plaintiff with a money judgment becomes a property owner. The name of the plaintiff’s property interest is a lien. It is commonly called a judicial lien or judgment lien to differentiate it from consensually created liens (mortgages or security interests) or tax liens.”

http://www.stjohns.edu/media/3/fed4a1dcdaec4f5d9ba50d92f06e7575.pdf

 

“Debtor's counsel and trustees often overlook judgment liens in determining the extent of distributions afforded by bankruptcy. Because the abstracted judgment constitutes a secured claim, it is entitled to treatment as a secured claim under the Bankruptcy Code. 11 USC 506.”

“A debtor may also seek to set aside a judicial lien by claiming it represents an avoidable preferential transfer. 11 USC 547. [H]owever, assuming the judgment creditor is not an insider of the debtor, a judgment lien (created by abstracting, garnishing, executing, sequestering, etc.) which attaches before the 90 day preference period or, if perfected within the 90 day period but subject to an exception, will be treated as a secured claim in bankruptcy.”

http://www.canteyhanger.com/content/nacm%2010%20tips%20collection%20crdtr%20perspctve%202011.pdf

 

The action that has been filed against Suntech is called a motion for summary judgment in lieu of complaint:

When an action is based upon an instrument for the payment of money only or upon any judgment, the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint. The summons served with such motion papers shall require the defendant to submit answering papers on the motion within the time provided in the notice of motion. The minimum time such motion shall be noticed to be heard shall be as provided by subdivision (a) of rule 320 for making an appearance, depending upon the method of service. If the plaintiff sets the hearing date of the motion later than the minimum time therefor, he may require the defendant to serve a copy of his answering papers upon him within such extended period of time, not exceeding ten days, prior to such hearing date. No default judgment may be entered pursuant to subdivision (a) of section 3215 prior to the hearing date of the motion. If the motion is denied, the moving and answering papers shall be deemed the complaint and answer, respectively, unless the court orders otherwise.

http://www.nycourts.gov/courts/nyc/civil/cplr3213.shtml

 

In other words, it's designed to be adjudicated much more quickly:

New York State has a particular mechanism to expedite judgment in matters involving a promissory note (and others involving an instrument for the payment of money only, or upon any judgment) CPLR 3213 provides for notice of a motion for summary judgment in lieu of a complaint. This means that, rather than filing a complaint, waiting for an answer, perhaps going through discovery, and then filing a motion for summary judgment, can instead go straight to the motion. This mechanism does not exist in Federal Court.

http://blog.eschwarzesq.com/a-promissory-note/

 

Suntech has basically three choices: they can appear and spend money contesting the action (although it's difficult to think of what defenses they could raise), they could just default and let the judgment be awarded against them (which opens them up to stepped-up collections efforts), or they could file bankruptcy and stay the action.

 

One other interesting aspect - this guy Abdalla Al-ayrot has come up with a theory about Chinese solar called the "jobs transformation scheme".

"It’s a scheme that the Chinese use to transfer jobs in the solar manufacturing industry from the rest of the world to China. The most surprising thing about the scheme is that the financiers of the JTS are naive western investors, who joined the solar energy bandwagon. The only good thing about JTS is that smart investors can make money of it, by shorting it."

http://abdallafinancial.com/?p=101

 

His whole report is worth reading:

"What the Chinese have effectively done with all of its Chinese PV manufactures companies listed in the USA, is tap ping western investors for funds . The funds have been used to build factories in China, and thereby creating jobs in China. The Chinese have overextended the capacity in the industry by expanding the Chinese PV manufactures production facilities with western investors’ funds. Instead of cutting down the capacity of the Chinese PV manufactures, in order to stabilize the market, they kept expanding the production facilities. After the crazy overextension of capacity, the Chinese began dumping (selling below c ost) Chinese PV modules in the USA and Europe. This has lead to western competitors going out of business, as the whole industry experienced and still experience negative gross margins. More western competitors will go out of business, as there are only a few PV manufactures in the western world, with deep enough pockets, to survive this oversupply and overcapacity in the solar industry. This is obviously good for the Chinese economy as it keeps and creates jobs in China by using and burning foreign investors’ money.

What happens when the companies can’t pay back their foreign investors, is, that the default on the debt to foreign investors triggers cross defaults on all of the company’s debt. When that happens the Chinese state owned banks gets the assets of the subsidiary that they have provided the loans to. Because the Chinese state owned banks have provided loans to the Company’s subsidiary and not to the listed holding company, the Chinese state owned banks get the assets of the company before the foreign investors are getting paid. When it’s the foreign investors turn to claim the assets of the company, there are s imply nothing left but papers indicating the company is a company."

http://abdallafinancial.com/wp-content/uploads/2013/04/JTS_28032012_V01.pdf

[walt373]

A letter was sent out to bondholders in May (attached) saying that the plan is to form a Working Group "during the forbearance period" (i.e. before June 28). And "the Working Group will work to agree upon a framework for achieving... a restructuring of the Notes via equitization at the holdco level on terms and conditions acceptable to Noteholders."

 

It sounds like the stock will get heavily diluted. If it turns out to be something like 95% dilution, the current market value of the bonds will be equivalent to about 4-5 cents per share of STP. So if the stock "only" falls to 10 cents, bondholders could actually make a nice profit. It seems to me like it's in their best interest to get this rolling while the stock is still high. I'm not sure when this will actually be announced though, since although they want to form the Working Group during the forebearance period, that might not include making the all the decisions by then.

 

T-bone, I don't think the bondholders are Chinese. The Chinese lent money to the Wuxi Suntech subsidiary in China. These bonds are at the holding company level. According to this article, http://www.bloomberg.com/news/2013-03-13/wall-street-may-lose-in-541-million-suntech-bond-default.html, "Mount Kellett Capital Management LP, Driehaus Capital Management LLC, Pioneer Investment Management Inc., Silverback Asset Management LLC and Susquehanna International Group LLP owned about 32 percent of the debt."

 

And by the way, the two largest ETF shareholders, TAN and PBW, sold out in March. According to Yahoo, http://finance.yahoo.com/q/mh?s=STP+Major+Holders, no institutions or mutual funds own more than 0.78% of outstanding shares. Gotta wonder who still owns this.

STP_Notice_to_Noteholders_dated_05.23.13.pdf

[Olmsted]

Here's two interesting references about the interface between judgment liens and bankruptcy.

“The creation of a lien is the transsubstantial moment at which a plaintiff’s in personam right graduates into a right in rem. At this point, the plaintiff with a money judgment becomes a property owner. The name of the plaintiff’s property interest is a lien. It is commonly called a judicial lien or judgment lien to differentiate it from consensually created liens (mortgages or security interests) or tax liens.”

http://www.stjohns.edu/media/3/fed4a1dcdaec4f5d9ba50d92f06e7575.pdf

 

Fascinating strategy Trondheim is pursuing!  Do I understand correctly (and I probably don't) that they are trying to turn their unsecured claim via judgment into a lien, and then be treated as a secured creditor?

 

And by the way, the two largest ETF shareholders, TAN and PBW, sold out in March. According to Yahoo, http://finance.yahoo.com/q/mh?s=STP+Major+Holders, no institutions or mutual funds own more than 0.78% of outstanding shares. Gotta wonder who still owns this.

 

Really, who does own this? The passive management theory was all I could come up with.  Jeez, that means many/most current owners recently made a conscious decision to buy this.  Wow.

[Hielko]

It seems like a fun stock for people who want to day trade, speculate and gamble a bit.

[walt373]

Does anyone have any thoughts on possible jurisdiction issues the NY court may have due to Suntech being a Cayman Islands corporation? Or any other issues the Trondheim lawsuit could run into?

[Kraven]

Does anyone have any thoughts on possible jurisdiction issues the NY court may have due to Suntech being a Cayman Islands corporation? Or any other issues the Trondheim lawsuit could run into?

 

I don't know anything about this case at all so have no idea whether the facts are different, etc. In addition, my recollection is a bit fuzzy on this issue. What I remember is that the US and Caymans don't have a treaty providing for reciprocal recognition and enforcement of judgments and that its unclear whether a judgment in a US court against a Cayman entity would be enforced by the Cayman courts against the entity. It can also be difficulty just to even effect service of process on the Cayman entity in the US but often they have agreed to have someone accept it for them. However, in terms of enforcing a judgment, if there is property or assets in the US I believe the courts could enforce a judgment against that. But again, I have no idea what is going on here with Suntech and my memory on these issues is cloudy. So don't rely on this and I could very well be (and probably am) completely wrong. Hope this helps.

[walt373]

So it sounds like that could be a potential problem. Thank you for the info.

 

Edit: my friend pointed out to me that the bonds are governed by New York law so maybe jurisdiction is not such an issue.

[walt373]

I saw a Chinese article today discussing the forbearance deadline and the Trondheim lawsuit: http://finance.ifeng.com/news/special/wxsddl/20130619/8145012.shtml. It's a bit hard to read using Google Translate but you can get a pretty good idea. It makes it sound like the convertible bondholders do not want to continue forbearance for much longer.

[danconia17]

if the new forbearance agreement contemplates equitization, that should get the current common to $0.001 pretty quickly i would think.  Yet here we sit at $1.00 still...  bizarre.  aug/sept puts the way to go.

[T-bone1]

Sounds like the Trondheim lawsuit is going ahead and that they picked a judge.  Suntech's lawyer (who I think is the same lawyer Ruth Madoff used!) is going to try to delay this case, but the judge might not allow it.  The company has already been guilty of fraud at a subsidiary, and has been in default for a while, so there is a good argument to be made that they shouldn't get any more time.

 

Also, I think the judge is a 90 year-old Republican WWII vet.  You can't judge a book by its cover, but I think this guy's profile makes it slightly more likely that he will not be lenient to a foreign fraudster bankrupt company with Madoff's lawyer, looking for an extension when they have been in default for months:

 

http://en.wikipedia.org/wiki/Robert_P._Patterson,_Jr.

 

I continue to be amazed at the market cap of this company, especially given that they explicitly stated in the most recent forbearance agreement that they were attempting to equitize the debt:

 

http://wsav.membercenter.worldnow.com/story/22712182/suntech-announces-new-forbearance-agreement-with-holders-of-3-convertible-notes

 

I still don't see any way for any recovery for anyone other than the Chinese banks that effectively own the assets and Chinese trade creditors that are trying to seize them. 

 

I own a very small amount of puts, so I am definitely biased, but I don't think I've seen something like this before.  $500 million of (worthless) bonds trading at 25 and the equity still has a $200 million market cap. 

 

I don't believe there are even any US assets to seize, but it sounds like Trondheim might be able to at least get some of their office furniture - I hope they had good taste!

 

[Josh4580]

Which puts specifically do you own?

 

The ask on the Sept $1 puts are 33 cents for a max gain of 3X

 

The ask on the Dec $1 puts are 48 cents for a max gain of 2X

 

The ask on the Jan 2014 $1 puts are 50 cents for a max gain of 2X

 

The cost to short this stock is over 100% annually

[danconia17]

the 50c puts in aug/sept seem to offer the most bang for the buck.

if this does file bk (voluntary or involuntary) those should be money good.

[T-bone1]

Which puts specifically do you own?

 

The ask on the Sept $1 puts are 33 cents for a max gain of 3X

 

The ask on the Dec $1 puts are 48 cents for a max gain of 2X

 

The ask on the Jan 2014 $1 puts are 50 cents for a max gain of 2X

 

The cost to short this stock is over 100% annually

 

I own a few July $0.50 puts that I bought a while ago . . . doesn't seem like it is going to work out in that time frame.  If I can figure out the timing of a voluntary or involuntary BK filing, I will buy more with an appropriate expiration. 

[value-is-what-you-get]

the 50c puts in aug/sept seem to offer the most bang for the buck.

if this does file bk (voluntary or involuntary) those should be money good.

 

Agreed.  I own some Sept .50 puts.  Right now at the ask of .09, the max upside is 5.5X.  Small position mind you!

[LC]

Any idea why the stock price jumped today? All I could find was an article saying China is increasing its solar use: http://www.prcarbon.com/press/china-to-increase-solar-capacity-to-35-gw-ldk-suntech-first-solar-sunpower-canadian-solar-trina-solar-yingli-green-energy-1007626.html

 

 

[T-bone1]

Any idea why the stock price jumped today? All I could find was an article saying China is increasing its solar use: http://www.prcarbon.com/press/china-to-increase-solar-capacity-to-35-gw-ldk-suntech-first-solar-sunpower-canadian-solar-trina-solar-yingli-green-energy-1007626.html

 

Looks like all of the Chinese companies were up on that news . . . I think speculators are once again hoping the Chinese government will bail these companies out.

 

Suntech is zero under any circumstance other than the Chinese government spending $1 billion dollars to bail out the foreign holders of a worthless company (with outdated factories, so little ongoing value even with a bailout).

 

As far as timing, it seems the large bondholders are content to kick the can down the road for a while rather than take the loss.  Charlie Munger might have something to say about the incentives that might drive someone who is managing other people's money to delay taking a loss on a speculative position that didn't work out. 

 

My guess is that at some point, either the bondholders will negotiate a pre-packaged BK deal that wipes out the equity, or smaller creditors will force this into liquidation. 

 

But until something forces the hand of the large bondholders, it seems like their two choices are to take a zero today, or extend and pretend . . .

 

(I wonder what their LP's think about paying fees on these "assets")

[walt373]

The press release from 6/28 said, "In the coming weeks, the Bondholders and the Company will work toward a framework agreement regarding the specific terms of a debt restructuring and equitization." That was two weeks ago, so depending on how many weeks "in the coming weeks" means, we could see details soon. If they straight up say they are going to dilute equity by 95-99%, I think there's very little room for interpretation there. Then again, when equitization was first mentioned, the stock ignored it, so there's no telling if something even more obvious will trigger a fall.

[LC]

Latest press release:

 

"

In connection with the grant of a definitive moratorium on creditor claims from the judicial authorities in Schaffhausen, Switzerland to Suntech Power International, Ltd. (“SPI”), the Company’s principal operating subsidiary in Europe, the Company and various of its affiliated entities, including Power Solar Systems Co., Ltd. (“PSS”), the Company’s principal subsidiary in the British Virgin Islands, and Wuxi Suntech Power Co., Ltd. (“Wuxi Suntech”), the Company’s principal operating subsidiary in China, have submitted creditor claims to the administrator overseeing the moratorium.

 

The Company, PSS, and Wuxi Suntech submitted applications to register with the SPI administrator claims of approximately US$192.7 million, US$324.0 million, and US$454.3 million (of which approximately US$350.0 million is subordinated), respectively. Such amounts followed a restructuring of intercompany debt among various operating units. In addition, other affiliates of the Company submitted applications to register with the SPI administrator claims aggregating approximately US$23.8 million. The actual amounts recovered by the Company and its affiliates as creditors of SPI may differ significantly from the amounts registered. Several of the affiliates of the Company which registered claims as creditors are also debtors to SPI.  As previously announced, the definitive moratorium was granted on June 19, 2013 for a six month period and may be extended thereafter, and allows SPI time to restructure debt and reach an agreement with creditors. In addition, in connection with the intercompany debt restructuring, the Company’s principal Japanese and Singaporean subsidiaries, Suntech Power Japan Corporation and Suntech Power Investment Pte. Ltd., respectively, have been reorganized under Wuxi Suntech.

 

The Company believes the restructuring was necessary to facilitate possible financing of the Company’s operations in the future and potentially attract new investors."

[Josh4580]

LC,

 

What does this mean in English?

[LC]

Ha! It took me a few reads to form a grasp what it's saying. Here's my understanding:

 

Essentially, Suntech China (Wuxi Suntech) owns the debt of Suntech Europe in the amount of $1bln. Wuxi is giving Suntech Europe an extension of six months as of June 19, 2013 to fulfill their debt obligations. As such, they officially registered their credit claims with Swiss authorities.

 

Additionally, Wuxi Suntech "restructured" various other Chinese corporate entities of under Wuxi Suntech.

 

"The Company believes the restructuring was necessary to facilitate possible financing of the Company’s operations in the future and potentially attract new investors."

 

I'm not sure what their plan is...are they planning on consolidating all the debtholders under Wuxi, then write down all the debt (bankrupting Wuxi?) and try and suck in more US/European investors?

[nnayyar]

    http://finance.yahoo.com/news/solar-panels-pile-china-takes-210746361.html

 

    People in the polysilicon industry say the moves will halve China's production capacity to 100,000 metric tons (110231 tons) a year, leaving around 10 relatively strong firms with better technology and cost efficiency.

    "Most producers will be eliminated rather than acquired. This may sound cruel, but is the reality as they are technologically uncompetitive," Lu Jinbiao, a senior official at China's top polysilicon producer GCL-Poly Energy, told Reuters.

[walt373]

Today's the deadline for Suntech to respond to the Trondheim lawsuit. Here's a letter from Suntech's lawyer asking for an extension from Jul 15 to Aug 15: http://www.scribd.com/doc/155798655/Endorsed-Letter-pl. The judge gave them until Aug 1 (handwritten at the bottom).