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Solar assets could languish on the auction block

by Kathryn Spencer | Published July 27, 2012 at 3:00 PM

As a glut continues to chill the fortunes of solar panel manufacturers, solar companies that have chosen to put assets up for sale through auction processes may have a tough time competing with companies that are divesting assets through bankruptcy sales.

Since Jan. 1, 2010, roughly 27 solar-focused companies have either filed for bankruptcy or issued a going-concern warning, indicating a Chapter 11 or Chapter 7 filing could be just around the corner.

Two companies now have assets up for sale through auction processes that aren't connected to bankruptcies. Solar EnerTech Corp. began a strategic review process on March 20, joining BP plc, which said in December that it was looking for buyers for a handful of solar projects.

Solar EnerTech is among the going-concern-warning crowd, with three of them, the most recent being issued by Child, Van Wagoner & Bradshaw PLLC on Dec. 27. The company hired FTI Consulting Inc. to review alternatives and voluntarily delisted its common stock from trading, according to a March 20 press release, which quoted CEO Leo Shi Young as saying that Solar EnerTech's "liquidity and financial position continues to be more and more challenging." The firm, which has offices in Mountain View, Calif., and Shanghai, makes solar cells and modules.

The company did not return calls seeking comment.

Meanwhile, BP is selling two flagship initiatives in the U.S. and Australia as a step toward closing its solar division completely.

"The major global solar markets have experienced tremendous change over the past few years and we have been unable to generate the necessary returns to continue our operations," the solar section of BP's website explains.

Originally included in the sale was BP's participation in the 150-megawatt Moree Solar Farm in Australia. According to a Feb. 24 statement posted on the Moree website, BP Solar was expected to pull out of the project and Fotowatio Renewable Ventures and Pacific Hydro would take up the minority equity stake previously held by BP, which declined to comment on the project. BP is also looking to exit its solar farm joint venture with the Long Island Power Authority. Though BP declined to comment on the status of that stake, LIPA still lists the BP project on its website.

Industry watchers, however, believe most potential buyers would likely opt to buy assets on the cheap in a bankruptcy sale rather than acquire what Solar EnerTech and BP are hawking.

Gordon Johnson at Axiom Capital Management Inc. said that the majority of companies that have gone bankrupt make thin-film solar panels, which use a thin slice of photovoltaic material like silicon. A lot of these companies were developed five or six years ago when demand for solar panels was projected to skyrocket, particularly in Europe, Johnson said.

At that time, the prevailing technology for solar panels was crystalline silicon, which has a 17% to 18% efficiency conversion rate, as opposed to thin film, which has a 9% to 12% conversion rate, Johnson explained.

But as more players got in on the solar market, polysilicon supply dried up and prices shot up to an average of around $400 per kilogram in February 2008, according to Mehdi Hosseini, an analyst at Susquehanna Financial Group LLLP who focuses on clean technology. That's compared with an average price of $300 per kilogram in the first quarter of 2007 and $125 per kilogram in the first quarter of 2006.

"Because the price associated with crystalline silicon was exorbitantly high, all of these thin-film companies that were able to construct their product for much cheaper started popping up," Johnson said.

Since then, polysilicon prices have steadily fallen, enabling companies to make more efficient panels for less money.

Polysilicon prices, which Hosseini said were now hovering at near lows, averaged $20.85 per kilogram on July 25.

"You can get a cheaper panel that's massively more efficient at converting sun to energy, so why would you buy thin-film for anything?" Johnson said. "You won't. And that's why they're going bankrupt. It makes zero sense to buy their assets. You may get it on the cheap but you won't be able to sell what you're buying."

Susquehanna's Hosseini agreed that finding eager buyers for the assets -- both bankrupt and nonbankrupt -- will be an uphill battle. He expects a majority of the sales will just fizzle out without a transaction being completed.

"These assets are commoditized, unlike high tech or other industries where years of R&D have created intellectual property that's part of the asset," he said. "It's a debate about what the value is."

Because continued bankruptcies mean buyers can always find the assets cheaper, they never have a chance to appreciate in value, Hosseini said, adding that he expects some Chinese companies will start to downsize, too.

But for buyers who are still interested in purchasing some of these assets, the bankrupt entities are likely to be the place they would look first, according to Seth Masia at American Solar Energy Society, a nonprofit association of solar professionals.

"If you're looking for an inexpensive way to get into this market or you're already in it and you're looking to lower costs, picking up some of this equipment for 50 cents on the dollar in a bankruptcy sale would probably make pretty good sense," Masia said, adding that potential buyers wouldn't necessarily need to be involved in the solar business at all.

"Some of the stuff could be reprogrammed for use in any automated factory or in any industry that uses glass or large sheets that need to be moved around," Masia said, naming window companies and automobile glass companies as possible examples.

"When the price goes low enough, anything can happen," he said, noting that he hadn't heard of any deals with buyers outside of the solar industry.

Although continued reports of bankrupt solar companies may sound bleak -- seven solar firms (Abound Solar Inc., NovaSolar Inc., Signet Solar Inc., Solar Millennium, California Green Designs Inc., Solar Trust of America LLC and Q-Cell SE) have filed for bankruptcy since April, according to The Deal Pipeline -- the market for solar installations is actually relatively strong, according to a study released in June by GTM Research and the Solar Energy Industries Association.

Led by growth in the commercial market, a total of 506 megawatts of solar photovoltaics were installed in the first quarter, the second-highest quarter for installations ever, the report said.

The study forecast total installations to exceed 3,200 megawatts in 2012 -- 75% greater than last year's total and 15% higher than previous forecasts for the year.

The problem is, despite healthy and growing demand for solar panels, manufacturers are still creating more solar panels than the market can absorb, according to Rhone Resch, CEO of the Solar Energy Industries Association.

"Module manufacturers are hurting and that's due purely to the price environment," Resch said. "There's only so long that you can sell solar panels at a loss before your investors and your board of directors pull the plug."

Hosseini at Susquehanna Financial cautioned against taking research of booming solar demand at face value, saying it can be "misleading" when not considering the larger environment.

"The problem with the industry is that the demand was blindsiding people and causing added capacity blindly," he said. "The price escalator also never kicked in -- electricity prices are not going up as much as the solar industry was expecting."

That's not to say that all parts of the solar industry are hurting.

"There's a massive growth in the companies doing installations," Solar Energy Industries Association's Resch said. "One segment may be suffering and another is thriving."

Solar manufacturers started buying up installation companies about five years ago to diversify their revenue stream, Resch said, noting manufacturer SunPower Corp.'s $332.5 million acquisition of installer Powerlight, announced in 2006, as one of the first big examples of such a deal.

"Most of the module manufacturers have acquired or developed capabilities to develop projects that utilize their panels or at least provide an additional income stream," Resch said.

Consolidation is likely to continue on the manufacturing side of the business, Resch said, while the installer side will likely continue to be dominated by small installers on the local and national level.

"This is the Wild West right now in the energy industry in that there's a lot of new business models," Resch said. "As we're going through this rapid growth, there are winners and losers. Ultimately, figuring out the optimal business model is going to come from a market solution being developed by entrepreneurs rights now."

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Tags: auctions | bankruptcy | solar | Solar EnerTech

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