Sale and repurchase deal – is GCL New Energy scrabbling for funds?

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Is debt-saddled Chinese solar developer GCL New Energy scrambling for cash with another round of loan repayments on the horizon, or has the company hit upon a novel wheeze to obtain affordable short-term financing?

An announcement to the Hong Kong Stock Exchange at the tail end of last week revealed an arrangement between two indirect subsidiaries of Hong Kong-based GCL to sell 80 MW of PV capacity tied up in four project companies – on the understanding they will have to buy them back at the same price.

Given GCL subsidiary Suzhou GCL New Energy will bank – and then repay, possibly in short order – RMB420 million ($62.3 million), the consultancy fee of RMB10.5 million it will hand over to an associated business of the third-party in the transaction will effectively amount to short-term interest of 2.5%.

It is hard to escape the conclusion GCL needs cash, with pv magazine having reported in October a RMB21.4 billion slice of the RMB61.3 billion debt pile reported by the company last summer is due for repayment in July this year. Given Greater Bay Area Asset Management Co Ltd – effectively the lender in this arrangement – can force the GCL subsidiaries to hand back the cash at 15 days’ notice after the initial sale though, the deal hardly constitutes concrete fundraising.

The stock market update outlining the transaction gave little away, with parent company GCL New Energy stating simply: “As a developer of solar power plant projects, the group [GCL New Energy] requires capital from time to time to construct its solar power plant projects. The directors believe that the group will be able to derive additional liquidity utilizing its existing investments in the disposal targets under the equity transfer agreements, and [will] benefit from the short term use of the sales proceeds to support its business and operational activities.”

To me, to you

Under the terms of the transaction, spelt out on Friday, Suzhou will sell its wholly-owned Hetian GCL Photovoltaic Power Co Ltd; Dengku GCL Photovoltaic Power Company Ltd; and Zhengyuan County Xuyang New Energy Technology Co Ltd businesses to Greater Bay Area Asset Management. Fellow GCL indirect subsidiary Ningxia GCL New Energy will sell its Ningxia Xinken Jianquan Photovoltaic Power Co Ltd project company to the same buyer at the same time, with the RMB420 million fee paying for the four units.

During the following six months, either party has the option of triggering a repurchase by Suzhou GCL New Energy of all the projects – leaving Ningxia GCL New Energy out in the cold – for the same price. After six months have elapsed, purchaser Greater Bay can trigger a repurchase by Suzhou for RMB420 million at any point.

To facilitate the deal, Suzhou will be obliged to pay a company nominated by Greater Bay the RMB10.5 million consultancy fee. The consultancy nominated is Greater Bay Area Consultancy (Guangdong) Ltd.

The fact the deal is effectively a short-term loan is further indicated by the stipulation the projects in question will remain subsidiaries of Suzhou and the same business will continue to operate the PV projects as ownership of them shuttles back and forth.