LDK Descends Back Into Trouble

LDK Solar (LDK) dropped 15% today as the company announced it will issue 18.9 American Depository Receipts as part of a larger bid to remain a going concern. 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 capital deficit and incurred a net loss of $209.9 million for the nine months ended September 30, 2009; if we do not successfully execute our liquidity plan, we face the risk of not being able to continue as a going 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., total consolidated current liabilities exceeded total consolidated current assets) 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 loss of $209.9 million and used $95.2 million of cash in operations. As of September 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-term bank borrowings and current installments of our long-term debt totaling $1,103.8 million are the obligations of these subsidiaries. These factors initially raised substantial doubt as to our ability to continue as a going concern. We are in need of additional funding to sustain our business as a going concern…”

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

The plan includes:

  1. potential asset sales, obtaining a separate commitment to purchase a 10% equity investment, in addition to the power plant projects we develop for sale, such as the one in Germany held by our associate, LQ Energy 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 the stock performance of most other publicly traded Chinese solar companies in 2009. Almost two weeks ago, LDK smoothed over its contract dispute with Q-Cells and the stock market response was enough for me to declare that 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 stop at the 50-day moving average (DMA) did not trigger, but I do not expect this critical support to hold (chart not shown). After that point, LDK will be a prime candidate for a short again (the stock is already below the 200DMA). I will not likely initiate a short position, and instead I will watch for developments that suggest LDK may yet overcome its financial woes.

Be careful out there!

Full disclosure: long LDK

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