LDK Descends Back Into Trouble (LDK)

ldk LDK Descends Back Into Trouble (LDK)

LDK Solar(LDK) dropped 15% today as the company announced it will issue 18.9American Depository Receipts as part of a larger bid to remain a goingconcern.

LDK filed a 6K with the SEC summarizing its problems with cash flow, and its plan to arrest its descent into bankruptcy. The introduction states: “We are operating with a significant working capitaldeficit and incurred a net loss of $209.9 million for the nine monthsended September 30, 2009; if we do not successfully execute ourliquidity plan, we face the risk of not being able to continue as agoing concern.”

The details of LDK’s finances demonstrate the seriousness of the situation (emphasis mine):

“At September 30, 2009, we had a working capital deficit (i.e., totalconsolidated current liabilities exceeded total consolidated currentassets) of $1,151.7 million and an accumulated deficit of $8.5 million.During the nine months ended September 30, 2009, we incurred a net lossof $209.9 million and used $95.2 million of cash in operations. As ofSeptember 30, 2009, we had cash and cash equivalents of $67.7 million,most of which are held by subsidiaries in China. Most of our short-termbank borrowings and current installments of our long-term debt totaling$1,103.8 million are the obligations of these subsidiaries. Thesefactors initially raised substantial doubt as to our ability tocontinue as a going concern. We are in need of additional funding tosustain our business as a going concern…”

LDK has formulated a plan, but it makes it clear that “…we cannotassure you that we will successfully execute our liquidity plan. If wedo not successfully execute such plan, we may have substantial doubt asto our ability to continue as a going concern.”

The plan includes:

  1. potential asset sales, obtaining a separate commitment to purchasea 10% equity investment, in addition to the power plant projects wedevelop for sale, such as the one in Germany held by our associate, LQEnergy GmbH
  2. obtaining additional bank loans
  3. raising capital from equity offerings
  4. renegotiating contracts with our suppliers to obtain more favorable payment terms.

Clearly, there is a good reason that LDK has seriously lagged thestock performance of most other publicly traded Chinese solar companiesin 2009. Almost two weeks ago, LDK smoothed over its contract disputewith Q-Cells and the stock market response was enough for me to declarethat LDK was positioned for a strong year-end close. The technical picture was quite a turn-around from the technical breakdown I noted in early October. It turns out that the Q-Cells dispute was merely the tip of the iceberg instead of the end of the turmoil.

I was surprised that LDK did not drop even lower on the day. My stopat the 50-day moving average (DMA) did not trigger, but I do not expectthis critical support to hold (chart not shown). After that point, LDKwill be a prime candidate for a short again. I will not likely initiatea short position, and instead I will watch for developments thatsuggest LDK may yet overcome its financial woes.

Be careful out there!

Full disclosure: long LDK