UPDATE 2-Solar pain hits China as Suntech unit nears insolvency
* Lenders file petition for insolvency of Wuxi Suntech
* Wuxi Suntech will not file objection against petition
* Solar panel makers hit by overcapacity, trade dispute
* Move could signal China's support for industry waning
By Sui-Lee Wee and Swetha Gopinath
BEIJING/BANGALORE, March 20 (Reuters) - A group of lenders has filed a petition for the main subsidiary of China-based solar panel maker Suntech Power Holdings to be declared insolvent, a sign the country's support for the loss-making industry may be waning.
The imminent failure of Wuxi Suntech would be one of China's biggest corporate collapses in recent history and could also be the first big test for China's bankruptcy law since it was introduced in 2007.
The solar panel industry has been hit hard by overcapacity, falling government subsidies and trade disputes, with a string of firms around the world, including Europe's Q-Cells, filing for insolvency.
"This event is significant, showing that the Chinese banks are no longer unconditionally willing to lend money to the loss making industry, even if it's for a tier-one company like Suntech," Thiemo Lang, a portfolio manager at RobecoSAM in Zurich, told Reuters on Wednesday.
"The default is also a clear warning sign to other Chinese solar companies to repair their steadily worsening balance sheets, reducing spending," he said.
Beijing has made the development of the solar panel industry a priority. The sector employs hundreds of thousands of people and is the largest in the world by capacity, after local governments jostled to attract investment in the sector with preferential policies in recent years.
Analysts said allowing Wuxi Suntech to fail could trigger a crisis of confidence in the sector, although it might be received differently in Europe and the United States where solar panel makers have complained about state support for Chinese competitors.
Earlier, Chinese state news agency Xinhua erroneously reported that Suntech Power, which has a New York stock listing and was valued at $16 billion at its peak, had declared bankruptcy.
Suntech Power, the parent company of Wuxi Suntech, has not "commenced insolvency proceedings, nor have any of the company's other principal operating subsidiaries", the company said.
A group of eight Chinese banks had filed a petition for insolvency and restructuring of Suntech's principal Chinese operating subsidiary, Wuxi Suntech Power Holdings Co., Ltd., in the Wuxi Municipal Intermediate People's Court in eastern Jiangsu Province, Suntech said in a statement.
"Wuxi Suntech today notified the Court that it will not file an objection against the petition," Suntech said. "The company expects that the court will decide whether or not to accept the petition in the next few days."
Nine banks, including Industrial and Commercial Bank of China , Agricultural Bank of China and Bank of China had outstanding loans of 7.1 billion yuan ($1.1 billion) to Suntech at the end of February, according to Xinhua.
On Monday, Suntech said it had defaulted on $541 million of its bonds due on Friday, triggering cross-defaults on loans from International Finance Corp and Chinese lenders.
At the end of March 2012, Suntech had total debt of $2.2 billion - including loans from China Development Bank, and a $50 million convertible loan from the International Finance Corporation, the private sector arm of the World Bank.
China passed a new bankruptcy law in 2007 that is rarely tested because local officials generally mediate between creditors behind closed doors.
It is unclear whether Wuxi Suntech's assets might be divided and sold off to other solar companies, which creditors might be repaid in what order and whether the Wuxi government might ultimately step in to protect Suntech.
Beijing has also used its bankruptcy law cautiously, fearing that the failure of large companies and widespread layoffs could lead to social unrest.
Offshore creditors can push for bankruptcy proceedings against the Cayman Islands-incorporated company, but they would probably end up recovering little from the process given most of Suntech's assets are in mainland China and onshore lenders rank ahead of them in claims, analysts say.
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