Analysis: Bond default by state-owned firm may explain Yingli's woes

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The default on April 21 of Tianwei Baobian was the first public bond default by a unit of a state-owned Chinese firm. Baoding Tianwei Baobian Electric had been unable to pay a RMB85.5 million ($13.8 million) interest payment. At the time, Reuters reported that the company was not answering calls.

A financial announcement in September 2007 shows that Yingli Green Energy gave Baoding Tianwei Baobian Electric a loan that translates to $282 million at today’s exchange rate. Given that Tianwei Baobian has recently defaulted on public bond repayment, it appears likely that Yingli will not ever see the money.

Doubts about Yingli’s towering debts has long worried some solar observers. Rumors had circulated that the company was unlikely to raise debt from outside of China, without having to convert existing debt into equity, wiping out value for existing shareholders.

Smart Solar Consulting’s Goetz Fischbeck says that part of Yingli’s problems lie in its reliance on short-term borrowing.

"Yingli ended the year with $1.57 billion in short-term borrowings, $276.1 million in medium-term notes, and $460.7 million in long-term debt," said Fischbeck. "Apparently it is no longer so easy for Yingli to roll this short term debt." Fischbeck observes that this is a similar position to which failed European and U.S. solar players found themselves in during the solar downturn.

"The government of China has been very clear that it wants to reduce debt and is instituting more risk," added SPV Market Research’s Paula Mints. "Yingli’s current situation is an example of how many of China’s PV cell and module manufacturers were able to use debt instruments to take a commanding share of the PV industry. This sort of house-of-cards strategy is dangerous but it should enlighten PV industry observers as to the reality of the current industry supply side situation."

While with the recent announcement it may appear common sense that Yingli is facing serious problems, however, as late as last Thursday, Deutsche Bank analyst Vishal Shah had issued a note in which he concluded that Yingli’s balance sheet concerns should "alleviate" and that the company was benefiting from "a strong demand environment."