* Lenders file petition for insolvency of Wuxi Suntech
* Wuxi Suntech will not file objection against petition
* Local government expected to keep company afloat
* Industry struggling with global glut of solar panels
By Sui-Lee Wee and Swetha Gopinath
BEIJING/BANGALORE, March 20 A group of Suntech Power Holdings Co Ltd lenders want the Chinese solar panel maker's main unit declared insolvent, a sign Beijing's support for the struggling industry is waning.
The 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.
In its heyday in 2008, Suntech's market capitalization reached $16 billion. It now stands at about $105 million.
Suntech said in a statement on Wednesday that a group of eight Chinese banks had filed a petition for the insolvency and restructuring of its Wuxi Suntech Power Holdings Co Ltd unit in the Wuxi Municipal Intermediate People's Court in eastern Jiangsu Province.
The court will decide whether or not to accept the petition in the next few days, Suntech added.
Suntech's troubles have funneled customers toward relatively healthier domestic competitors such as Trina Solar Ltd and Yingli Green Energy Holding Co Ltd, but most analysts expect the company to survive with the help of a local government that wants to preserve manufacturing jobs.
"There is not going to be a liquidation," said Morningstar Inc analyst Stephen Simko. "Suntech in some form, probably under state control, is going to continue to exist."
China's notoriously aggressive solar manufacturing industry, spurred by government support, rapidly rose to become the world's largest in just a few years. But even as hundreds of factories popped up across China, European nations began to curb generous solar incentives, leading to a massive global oversupply of panels that has crippled the industry.
A string of formerly high-flying Western companies, including Europe's Q-Cells, have filed for insolvency, but those failures have not eased the oversupply that has sent solar panel prices into a tailspin and erased industry profits.
That is in part because Chinese companies burdened with massive debt have received government help to continue operating and shipping products to market. The Chinese solar industry employs hundreds of thousands of people and local governments have jostled to attract investment into the sector with preferential policies.
Local governments have already helped solar companies, including LDK Solar Co Ltd, Shanghai Chaori Solar Energy and Technology Co Ltd and CNPV Dongying Solar Power Co Ltd, according to GTM Research, and many analysts expect the city of Wuxi to do the same for Suntech.
"There will hardly be a dent in the over capacity plaguing the industry," Raymond James analyst Alex Morris said.
Nevertheless, some solar stocks reacted positively to the news. The shares of U.S. panel makers First Solar Inc and SunPower Corp were up about 6 percent and 8 percent, respectively, in afternoon trading. The shares of U.S.-listed Chinese companies JinkoSolar Holding Co Ltd, JA Solar Holdings Co Ltd, Trina and Yingli were also up.
Both Q-Cells and Suntech were, at different times in the last few years, the world's biggest solar panel maker.
Suntech said last week it had defaulted on $541 million of bonds due on Friday, triggering cross-defaults on loans from International Finance Corp and Chinese lenders.
"The Chinese banks are no longer unconditionally willing to lend money to the loss-making industry," said Thiemo Lang, a portfolio manager at RobecoSAM in Zurich. "The default is also a clear warning to other Chinese solar companies to repair their steadily worsening balance sheets.
Earlier, Chinese state news agency Xinhua erroneously reported that Suntech Power had declared bankruptcy.
Nine banks, including Industrial and Commercial Bank of China Ltd , Agricultural Bank of China Ltd 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.
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 Corp, 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. Beijing has used the law cautiously, fearing 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 given that most of Suntech's assets are in mainland China and onshore lenders rank ahead of them in claims, analysts say.