NEW ENERGY: Debt Woes Shine in Yingli Shares, Trina Spin-Off

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Bottom line: Trina’s plan to separately list its solar plant-building assets is likely to meet with lukewarm to frosty demand, while Yingli’s downward spiral will continue as customers abandon the company due to its financial weakness.

Trina eyes IPO for plant-building unit

More signs of stress are on display in the solar panel sector, where shares of the stumbling Yingli (NYSE: YGE) are coming under pressure after its latest earnings report and a new plan by Trina (NYSE: TSL) to separately list some capital-intensive assets has overtones of desperation. These 2 stories reflect the intense pressure solar panel makers continue to feel as their sector still struggles to recover from a downturn that dates back 4 years due to massive oversupply.

Panel prices have rebounded somewhat over the last 2 years and many of the best-run companies have returned to profitability during that time. But intense pressure still remains for less well-run companies like Yingli. Even better performers like Trina are feeling pressure as they pour massive money into construction of new solar power plants, in a bid to create more demand for their products.

The bottom line is that solar plant construction is a costly business and not many private sector companies want to get involved due to the volatile climate. The situation is particularly difficult in China, even though Beijing has committed to a massive build-up of solar energy. But like many things in China, a wide range of complicating factors exist for anyone who wants to actually try and build solar power plants in the country.

We’ll begin our solar round-up with reports that Trina is planning to spin off its unit that builds new solar farms, with an aim of eventually making a separate IPO for the company. (English article) Trina CFO Teresa Tan discussed the plan at a forum in the northeastern city of Dalian, and said her company would like to make the IPO as soon as next year.

Under normal circumstances such a plan might look attractive for investors, since such power plants provide stable returns by using cash generated from the sale of electricity to pay down debt and give a dividend to investors. But in Yingli’s case, this particular new company is likely to focus on construction of power plants in China. Such plants are far less reliable since they are more difficult to build due to local bureaucratic and technical issues. And even after construction is complete, many still often run into problems.

In Need of Cash

Trina could clearly use the cash it would get from an IPO, as the company had more than $1 billion in debt and just $600 million in cash in its last quarterly report. Much of the debt has come through a series of bond and stock offerings over the last year, a big portion of which is being used to build new solar plants that will buy their panels from Trina. I suspect investors will quickly realize the high risk associated with the company Trina now hopes to spin off, and demand for the IPO will be lukewarm at best and frosty at worst.

Next there’s Yingli, which is being spotlighted in a report that says its shares have tumbled 34 percent in the last 3 weeks over concerns about its future prospects. (English article) The company caused a panic earlier this year when it said it could be in danger of going out of business, but later back-tracked and said investors had misinterpreted its words. Its latest quarterly report looks quite gloomy, with the company saying shipments this year will come in at least 22 percent below its previous forecasts.

Yingli’s shares have traded below $1 since mid-July, and last month it said it was notified that it had until next February to bring its price back above $1 or risk being de-listed. (previous post) The shares now trade at 59 cents, and its quite possible they could fall even lower as Yingli slips closer to insolvency. I don’t see much cheer in YIngli’s future, since its customers are likely to abandon the company in growing numbers as concerns rise about its financial health, which will only further accelerate its downward spiral.

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