China walks away from state bail-out of GCL solar project business

It appears Beijing’s pockets are not bottomless after all.

Chinese solar manufacturer and project developer GCL’s plans to spin off the downstream business and become a pure-play producer have hit a significant bump in the road after the state-owned entity charged with acquiring the project business got cold feet.

The boards of parent company GCL-Poly Energy Holdings Ltd and its GCL New Energy Holdings Ltd subsidiary announced late on Monday night the terms of the proposed deal had changed, with state-owned China Hua Neng Group Hong Kong Ltd no longer intending to acquire 51% of the debt-laden project development unit.

With the Elite Time business of GCL which was acting as vendor in the transaction failing to reach agreement with China Hua Neng “after several rounds of friendly negotiations”, the Beijing-owned entity will now instead acquire “certain” GCL New Energy solar projects and/or their associated management companies in China.

Cherry picking

Whilst cherry-picking the most attractive assets from GCL undoubtedly makes sense for China Hua Neng, it remains to be seen what assets GCL New Energy will be left with. More importantly, the collapse of the mooted bail-out could scupper GCL-Poly’s manufacturing strategy by leaving a daunting debt pile on the parent company’s books.

First-half figures published by the project development business in August revealed the attractiveness of some of those coveted Chinese PV projects, with the company reporting a 22% rise in the volume of energy generated compared to the second half of last year, from a 7,128 MW portfolio. That added up to revenue of RMB3.17 billion (US$451 million) and net profits of RMB571 million, which China Hua Neng will no doubt be happy to acquire.

The problem lies in the debts amassed during the development of that solar estate. The first-half figures also revealed a current-debt-to-asset shortfall at the end of June of RMB11.3 billion, including RMB1.96 billion for which parent company GCL-Poly was unable to act as guarantor, triggering cross defaults.

Debt mountain

Total GCL New Energy net debt at that stage amounted to RMB39.3 billion, with RMB9.9 billion classified as current bank loans, 3.97 billion owned to bond and note holders – of which RMB564 million was classed as current debt – and RMB1.26 billion in lease obligations, RMB84 million of it current. Gross debt was RMB42.3 billion for a business with only RMB959 million in the bank and with only RMB3.45 billion of credit lines left.

As a result, there was talk of issuing a further RMB6 billion worth of notes and bonds, presumably to keep the project business limping along until it became Beijing’s headache. With the bail-out now having fallen through, the ball is firmly back in GCL-Poly’s court.