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Solyndra Filing for Bankruptcy

Stocks in this article: ESLR ENER SPWRA FSLR

Putting all of the rhetoric aside, the Solyndra story, at its core, is about a "cutting edge" technology that failed to keep pace within a still-nascent industry where low-cost and commoditization has increasingly been the rule. It also poses significant questions for the DOE and federal government in its effort to develop an effective financing model for a better energy infrastructure in the U.S.

Already this year embattled U.S. solar company Evergreen Solar (ESLR) announced its bankruptcy, while sector analysts expect a similar fate could be in the cards for Energy Conversion Devices (ENER), as well as several European companies, and Chinese solar manufacturers from the second and third tier ranks of its rapidly expanding solar sector. If Evergreen Solar's bankruptcy, too, was accelerated by the severe downturn in solar, the downturn was not the cause, as several Wall Street analysts have been calling the eventual Evergreen bankruptcy since the beginning of 2010. In fact, if the current industry downturn has quickened the failure rate within solar, record profits for the sector in 2010 may have simply prolonged the life of doomed companies like Evergreen and Solyndra.

Even the most successful U.S. solar companies are experiencing duress during the recent market gyrations, with First Solar (FSLR), a major recipient of DOE loan guarantees, turning cash flow negative for the first time in the past two quarters. First Solar is expected to be one of the long-term winners in the solar space, nevertheless, due to its leading cost model, but investors continue to debate whether its shares are overvalued in a market seeing such rapid price reductions and such fierce competition from China. SunPower (SPWRA), which continues to print quarterly losses and remains a high-cost vendor, has only recently been saved by French oil giant Total's (TOT) decision to buy 60% of the company and offer it a generous debt capital commitment for future solar project development.

The Department of Energy loan guarantee program backs up a company in the event of a default on outstanding loans, allowing banks to finance alternative energy projects that by their nature have a relatively high risk profile. If a company's operations are successful and it is able to meet loan payments, the DOE loan guarantee merely serves as a backstop to allow a project to move ahead with financing on reasonable terms without ultimately costing the U.S. taxpayer anything.

In the case of a Solyndra bankruptcy, however, the DOE was on the hook entirely, according to a New York Times account of the financing model. Unlike all of the other loan guarantees the DOE had made, Solyndra was loaned money directly from a federal bank. Solyndra had exhausted almost all of the loan guarantee -- $527 million of the $535 million total -- when it decided to declare bankruptcy. As of January 2, 2010, the last data for which Solyndra made a disclosure in its IPO filing, Solyndra had $140.9 million of borrowings outstanding under the DOE guaranteed loan facility and $907 million in equity financing.

The DOE loan guarantee program has faced significant opposition during the budget battles in Washington, and has already seen Congress scale back its funding this year. The Solyndra headline will no doubt be fodder for future attacks on the DOE loan guarantee program. In the least, it requires a reconsideration by the federal government of its evaluation and monitoring of its loan program grantees.

A Department of Energy spokesman described Solyndra as a success to the New York Times on Wednesday, saying it manufactured a product that was purchased by customers, a somewhat weak argument for calling a company a success that is laying off 1,100 workers after having used $527 million in federal money. In a Solyndra filing from January 2010, it had generated negative gross margins for 6 consecutive quarters and cost of revenue that continually was higher than revenue generated. By any standard market analysis, this is not a success, even if getting to scale in solar will result in ugly gross margins for a prolonged period of time.

The only dim hope of Solyndra going down in history as having had a more than temporary value as a temporary company that employed 1,100 Americans temporarily and had revenue which exceeded $100 million for one year, 2010, is if Solyndra's technology is somehow important in the future of the solar industry, now very much in doubt, and it will only be if it is purchased by another company and ultimately used successfully and for a sustained period, to a more mature stage of corporate development. Barring that it's a failure, a bad one, and a black eye on the federal government, the Department of Energy, and the private investment community. One more business failure involving both the government and private capital but one that was supposed to be a standard setter in a new sector.

For now, for all of its promise and hype, Solyndra was the gift that kept on giving to opponents of green energy and government funding of it. At least now, the solar company presented its last gift to detractors as it filed its bankruptcy papers. Its a gift that might prove to be more than a throwaway, though, unlike Solyndra's solar business.

-- Written by Eric Rosenbaum from New York

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