LDK Solar bond swap a sign that more defaults may be on the way

The mainland green energy firm LDK Solar yesterday announced a two-week extension for repayment of interest on a US$280 million bond. It was the seventh such grace period investors granted the issuer and it relates to unpaid interest that came due in August last year.

An investor in the bond, which matures at the end of the month, said the company was close to implementing a restructuring that would see investors exchanging the bond for shares and a convertible bond.

Investors have been asked to accept shares valued at a 47 per cent premium to its February 13 close. The convertible bond, representing 91 per cent of the value of the package, pays about half the interest of the bond it replaces, and investors will not get a cash coupon, but "payment in kind", or the equivalent value in new bonds.

In the first year, the bond will only be profitably convertible into shares if the LDK share price hits US$20, a remarkable 1,851 per cent conversion premium.

LDK is attracting attention in the market because the issuer also has 500 million yuan (HK$635 million) of notes in the domestic market that mature in December and investors are concerned about the issuer's ability to repay.

While no issuer has ever defaulted on a domestic bond, thanks to government-led interventions, many analysts and investors are expecting this year to be the year of the domestic default.

The problem is exacerbated by the fact that 2014 will see a tripling in the volume of domestic bonds due compared to the previous year, with US$173 billion of bonds maturing this year, according to Thomson Reuters.