The issue that Suntech, the world’s largest producer of solar panels, might have been the victim of a US$ 690 million fraud related to a European investment is deepening the anxiety of Chinese state-owned lenders.

On July 30, Suntech realeased a statement that it might have been the victim of a $690 million fraud related to a European investment and said the company decided to quit from its investment in Global Solar Fund (GSF). GSF is a fund with Suntech as its major investor, and the company is under GSF Parter’s wholly management. In May 2010, Suntech guaranteed a €554.2 million ($683 million) credit line for GSF portfolio companies from the government-run China Development Bank. Romero’s GSF Capital in turn pledged €560.0 ($690 million) in German government bonds as security for the Suntech guarantee.

“GSF Capital’s German government bond for the Suntech guarantee is probably non-existent, and Suntech may become the victim of fraud”, said in the company’s latest statement.

In 2008, Suntech paid €258 million ($318 million) to hold 80 percent stake in Global Solar Fund, a company set up to invest in photovoltaic energy projects. Suntech’s founder and chief executive, Dr Zhengrong Shi, took a 10 percent ownership share. The remaining 10 percent stake is held by an entity called GSF Capital that is controlled and wholly ownerd by Javier Romero, who serves on GSF’s board and manages the company, according to Suntech’s securities filings. Shi and Suntech’s chief technology officer, Stuart Wenham, serve on GSF’s board of managers and hold 50% of the votes, citing Forbes report.

“Mr. Javier Romero has never served as an employee of our company, but he previously served as a non-executive representative and sales agent of the company where he facilitated sales of our PV products in Spain until March 2008,” Suntech stated in its 2011 annual report.

Between 2009 and 2011, Suntech sold $346.8 million worth of solar modules to GSF’s portfolio companies, according to the company’s annual report. In 2009, sales to those companies represented 6.9% of Suntech’s net revenues. Those sales had fallen to 1.1% of Suntech’s revenues in 2011.
In May 2010, Suntech guaranteed a €554.2 million ($683 million) credit line for GSF portfolio companies from the government-run China Development Bank. Romero’s GSF Capital in turn pledged €560.0 ($690 million) in German government bonds as security for the Suntech guarantee.

Now Suntech has discovered those bonds may not exist.

“If the €560.0 ($690 million) in German government bonds as security for the Suntech guarantee is a fraud, the guarantee to China development bank’s loan will weaken”, said by an unknown people from Bank of China’s credit department in Jiangsu province. “There is increasing uncertainty in the company’s future development, and banks now focus on whether power generation plant that GSF invested in can function or not” he added.

The fact that Suntech intended to alleviate its cash strain by selling out its shares in GSF disclosed the potential fraud from GSF’s ghostly German government bonds, which in return further sabotaged the company’s capital stress.

The first quarter report of Suntech shows that company shouldered a debt up to US$ 3.575 billion and its total asset was around US$ 4.378 billion, with debt asset ratio of 81.7 percent.

More astonishingly, the company was tussled in current liability. At the end of 2011, Suntech’s current liability surged from previous US$ 321 million to US$ 1.573 billion, while its total value of cash and cash equivalents dropped from US$ 521 million to US$ 492 million. The cash to current liability ratio slumped from 1.62 to 0.31, meaning its short term debt paying ability significantly fell.

The incident of GSF’s ghostly guarantee increased Suntech’s debt table by billions of dollar. “We currently have not received any statement from Suntech. If it happened to cause such a huge debt to Suntech, then it will matter significantly”, one banker from creditor banks said.

China development bank and other several Chinese lenders are Suntech’s major creditor banks. The loan Suntech got from banks surged from US$ 56 million to US$ 1.7 billion since the end of 2005 to the end of last year. Bank credit soared 30 times in less than 7 years.

China Development Bank is the major creditor to Suntech’s GSF projects; however, there is no information about the lender’s detailed credit quota and means of gurantees.