Friday, December 18, 2009

"2nd UPDATE: LDK Warns On Ability To Continue As Going Concern" and "LDK Sells Poly Plant Stake, to Raise $164m in Issue " (LDK)

In late pre-market trade the stock is down 77 cents (9.82%) at $7.07.
No one should be surprised by LDK's problems. Back in August we had a post, "Solar: Gloom, Doom and Despair (LDK et al)" that said
...LDK Balance Sheet Needs Overhaul

For all its problems with inventory writedowns, LDK Solar's primary risk is its unwieldy 86% debt-to-capital ratio, says Colin Rusch, an analyst at ThinkEquity in New York. The company needs to restructure its balance sheet if it's going to survive, he says. Jesse Pichel, an analyst at Piper Jaffray (PJC), however, has maintained a sell rating on the stock for most of the past 18 months. Pichel is bearish because he doesn't see where the company will get the hundreds of millions of dollars in financing it needs to finish building a new polysilicon plant whose 15,000 metric tons of annual production is scheduled to come online in stages over the next year....MORE, including Pension Pulse's take on the industry.

In "LDK Solar Co. Ltd. Q2 2009 Earnings Call Transcript" our comment on this issue with LDK was:

This is just brutal. The analysts seemed stunned, 2x4 to the forehead style. The stock is trading at $9.12 down $2.09 (18.64%)....

(Then followed the first questions for management. Average selling prices, market penetration in Italy. Simply obtuse and inane stuff)

...What are these folks babbling about? Q-Cells, one of the largest in the world, just this morning had to reassure the markets that they had "Adequate Liquidity".

The first questions should drill down on survivability, as in "Will the Chinese government backstop your credit lines". Jeesh.

Liquidity is expensive. Illiquidity more so.*

If you don't know how to read a balance sheet and, more importantly, understand the interactions between the balance sheet and the statements of cash flows and income, you can get in big trouble.
The first headline is from this Wall Street Journal story:

(Updates with more analyst comment, background; updates share price)

   By Kerry Grace Benn

NEW YORK (Dow Jones)--Shares of LDK Solar Co. (LDK) dropped Thursday as the company said in a filing with the Securities and Exchange Commission that it faces the risk of not being able to continue as a going concern.

LDK posted a surprise third-quarter profit last month amid growing demand for solar wafers, and the Chinese maker of solar wafers and modules has been cutting costs and scaling back expansion plans. The solar-panel industry has been under pressure all year from sliding prices amid weak demand and the recession.

But it said Thursday it is operating with a "significant working capital deficit," adding it incurred a net loss of $209.9 million for the nine months ended Sept. 30. As such, LDK said if it doesn't successfully execute its liquidity plan, it faces the risk of not being able to continue as a going concern.

The company said as of Sept. 30, its working capital deficit was $1.15 billion.

It said it plans to take several steps to address its liquidity problems, including potential asset sales, getting more bank loans, stock offerings and renegotiating contracts with suppliers....MORE

And from JLM Pacific Epoch:

Jiangxi-based multicrystalline wafer maker LDK Solar (NYSE:LDK) has agreed with VMS Investment Group to sell between $50 million and $80 million of shares in a to-be-created subsidiary which will hold and operate LDK Solar's polysilicon business, LDK Solar announced December 17. According to the report, the polysilicon business is valued at $1.30 billion to $1.65 billion. The investment is expected to close by the end of March 2010.

LDK Solar announced in an U.S. Securities and Exchange Commission (SEC) on December 17 that it expects to increase its total annualized polysilicon capacity to 18,000 metric tons (MT) by the end of 2010.

In the same SEC filing, LDK Solar that it is offering 18.9 million American depositary shares (ADS), to raise net proceeds of approximately $164 million, of which the company plans to use $120 million to pay off short term debt. The company noted in the filing that it had a net working capital deficit of $1.15 billion as of September 30, 2009, and faced uncertainties in obtaining additional funding for capital expenditures and working capital. LDK Solar plans to use around $30 million dollars from the share issue to fund on-going construction of the polysilicon plant, as well as expanding its module business, with a target capacity of 1.5GW.

Reports yesterday detailed deals signed by LDK Solar for its engineering, procurement and construction business in Europe.

*That sentence is from William Manchester's "The Arms of Krupp" which I took to heart. Here's an August 2007 post:

Liquidity in Business and Markets

'Liquidity is expensive but illiquidity is much more so, because it destroys the very existence of a firm"
I don't remember if it was Johannes or Ernst, it was a long time ago that I read Manchester, quoting one of the Schroeder boys on the insolvency of Krupp. That line has stuck with me. Here's the book....