A burning paper trail

Suntech Power, forced to put its Chinese solar unit into bankruptcy last month, began that slide into insolvency in 2009 when customers linked to the founder could not pay their bills and the company booked the sales as revenue anyway, regulatory filings show.

Seven buyers backed by an investment firm funded by Suntech and its founder, Shi Zhengrong, accounted for 29 per cent of Suntech's uncollected bills as 2009 ended, according to correspondence between the solar company and the US Securities and Exchange Commission (SEC). Those customers had not yet received enough money to go ahead with their projects and Suntech, once the world's largest solar panel maker, gave them more time to pay, the letters show.

The SEC correspondence provides clues to Suntech's prospects and a road map to business practices that left the company vulnerable to a €560 million (HK$5.58 billion) fraud and a US$541 million bond default. Anyone with internet access could have learned that Suntech was booking revenue from sales to related companies with unbuilt projects in the fledgling solar industry, while also guaranteeing loans to those related firms. It relied on a former sales agent to secure one guarantee with bonds it never saw.

"Digging through SEC correspondence is one of the most important things an investor should do before investing in any company - especially in companies that are higher risk or more opaque," said short seller Carson Block of Muddy Waters, whose analyst reports starting in November 2010 triggered US$7 billion in losses for Chinese stocks in two years.

Wall Street investors funnelled US$1.28 billion into Suntech, including the bonds and US$742.6 million of stock sales in 2005 and 2009. Last month Suntech said it received a notice of default on the US$541 million bond payment on March 15 and agreed with almost two-thirds of the holders to extend the due date to May 15. Analysts, including Standard & Poor's Angelo Zino, have said US investors might take big losses.

The solar panel maker's uncollected bills from related company projects exceeded sales from those companies by a widening margin. Receivables were US$44.7 million in 2011's first quarter, against US$33.6 million in revenue booked from the companies, according to filings. Sales dried up in later quarters and uncollected bills remained, filings show.

The bankruptcy of its China unit knocked the Cayman Islands-incorporated parent's US-listed shares down 16 per cent in two days. The stock, which made founder Shi worth about US$5.2 billion at its 2007 peak of US$88.35, is at 40 US cents now, after a glut of solar panels dragged prices down 69 per cent in two years. Shi founded Suntech in 2002 and took it public three years later, becoming the world's first solar billionaire. He obtained credit from the China Development Bank to wrest control of the industry from German and Japanese competitors.