Saddled with a massive pile of short-term debt and dwindling cash, solar-materials supplier GCL-Poly Energy Holdings Ltd. faces a potential liquidity crisis after its breach of a loan covenant triggered cross-default clauses in hundreds of millions of dollars worth of other bank borrowings, S&P Global Ratings said April 8.

The Hong Kong-headquartered company, which produces the raw material polysilicon and solar wafers for module manufacturers, finished 2019 with near-term debts that were more than three times larger than its holdings of cash and short-term pledges, and it is "highly uncertain" whether it will be able to meet its obligations, S&P Global Ratings said in a note downgrading a subsidiary of GCL-Poly, power plant developer GCL New Energy Holdings Ltd.

GCL-Poly is not alone. Heading into 2020, corporate debt in China ranked as the global solar industry's biggest challenge, according to Paula Mints, chief analyst at SPV Market Research. Corporate defaults in the country's solar sector could disrupt the global solar industry, threatening demand in the world's biggest market and leading to warranty and quality issues among manufacturers, Mints has warned in recent months.

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Past construction slowdowns in China's solar market have created equipment gluts that crashed global prices. And while Chinese manufacturers have been opening plants throughout Asia in recent years, the country still accounts for more than half of the world's production capacity for solar cells, Mints said in a December 2019 report. Including capacity that Chinese companies have moved offshore, that share jumps to 72%.

"All of China's capacity to produce solar cells was built on a foundation of grants and loans," she said, and the "mountain of debt ... is threatening to collapse."

Defaults rising

China has long viewed solar as a key strategic industry, and it used massive amounts of debt to build a dominant position in the global market. However, concerns have been growing recently about the risk of corporate defaults across China's economy. S&P Global Ratings said in late 2019 that it expected onshore bond defaults in China to rise this year, due in part to tight liquidity conditions for privately-owned enterprises.

In a March 31 filing to The Stock Exchange of Hong Kong, GCL-Poly acknowledged "material uncertainty" about its ability to continue as a going concern. However, the company said its board of directors believes it has enough working capital to meet financial obligations in 2020. The company said it is negotiating with lenders to try to resolve loan defaults. Talks with one lender in Europe have been delayed by the coronavirus pandemic.

Last year, GCL-Poly produced 57,394 MT of polysilicon, about 13% of the estimated 432,000 MT that were produced globally for the solar industry, according to a market assessment by REC Silicon ASA. The company also manufactured about 32,000 MW of solar wafers. Some manufacturers expect global solar demand to reach at least 140,000 MW this year. Others, pointing to risks posed by the coronavirus pandemic and new policies in China that could delay some projects, caution that 2020 could be the global solar industry's first down year since at least the 1980s

GCL-Poly, in its filing, said Beijing is adopting a "market-oriented" approach to the country's solar industry, and that the company is "fully aware" that it has to improve its "technology, cost, management and scale if it intends to cement its leading position in the industry."

"The negative outlook on [GCL New Energy] reflects our view that ... already weak liquidity could further deteriorate over the next 12-18 months" at GCL-Poly and GCL New Energy, the ratings agency said.

Investors are registering growing concerns about the companies' solvency. Bonds issued by GCL New Energy that mature in January 2021 are trading for about 38 cents on the dollar.

Overleveraged again

Some analysts and market participants are less troubled by the broader threat posed by corporate debt in China's solar sector.

Dennis Ip, head of power, utilities, renewables and environmental research at Daiwa Capital Markets Hong Kong Ltd., said that while he is concerned about some manufacturers, companies are benefiting from rising global demand.

"As a result, we see the top-tier manufacturers' balance sheets ... remain sturdy," Ip said.

Patrick Dai, general manager at Macquarie Investment Consulting (Shanghai) Co., noted that Chinese companies have carried heavy debt loads throughout the country's solar boom. "In the last two years, you have been seeing a combination of subsidies recession in China ... and new technology application ... which led to an overleverage situation again," Dai said in an email in February.

However, "I do not worry about the debt issue," Dai said, adding that he expected looser monetary policy from China's central bank to help support the country's economy this year.

The People's Bank of China recently cut its reserve requirement for some banks, freeing up about 400 billion yuan for small- and medium-sized businesses.

Debt in China's solar sector "is an ongoing issue, but I would say it's certainly not relevant right now because the government's doing everything they can to back up every manufacturer and prop up every sector of the economy" in response to the pandemic, Clean Energy Associates Ltd. CEO Andy Klump, who is based in China, said in a March 12 interview. "So I actually see there being more corporate debt that's going to go in."

As of April 10, US$1 was equivalent to 7.04 Chinese yuan.