Wednesday, September 28, 2011

The government is lousy at running anything

Solyndra LLC had such steep financial problems in late 2010 that the company violated terms of its loan-guarantee agreement with the Department of Energy and technically defaulted on its $535 million loan, according to people familiar with the matter.

Report on Solyndra

See the Congressional Research Service's report on the solar-panel maker.

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More photos and interactive graphics

The failed solar-panel maker, which is under numerous criminal and congressional investigations, ran so short of cash in December 2010 that it was unable to satisfy certain terms of its U.S. loan agreement, these people said. The agreement required Solyndra to provide $5 million in equity to a subsidiary building its factory but cash-flow problems prevented those payments.

WSJ's Ryan Tracy reports a new Congressional report says warnings about Solyndra's competitive abilities came out before the government awarded the company a $535 million loan guarantee and the company's subsequent collapse.

The Energy Department ultimately restructured the loan agreement to help keep the company afloat and Solyndra continued to draw money from its loan.

Solyndra's cash-flow problems in late 2010 had previously come to light but it was not known that the company technically defaulted on its loan and violated its agreement with the U.S. government.

The company's financial problems prompted the Energy Department early this year to allow it to reshuffle its debt. Under the arrangement, private investors agreed to provide a new $75 million loan and won the right to be paid ahead of the government if the company was liquidated.

The default is the latest indication of the serious financial troubles afflicting California-based Solyndra, which filed for bankruptcy protection earlier this month. It will likely add to questions surrounding the Obama administration's backing for the company even as its financial problems mounted.

Administration officials have defended the initial loan guarantee and subsequent restructuring, saying they were trying to protect taxpayers. Jonathan Silver, executive director of the loan program, recently told lawmakers the government faced the difficult choice of either forcing Solyndra to close its doors or approving the restructuring to give it "a fighting chance at success and the government a higher expected recovery on its loan."

On Tuesday, U.S. Bankruptcy Judge Mary Walrath of Delaware cleared the way for Solyndra's assets to be auctioned next month.

The company was the first to receive a loan guarantee under a program begun by President George W. Bush and expanded as part of President Barack Obama's 2009 economic stimulus package. Republicans have accused the Obama administration of rushing the guarantee for political reasons, and emails have surfaced showing administration officials ignored warning signs about the company's health.

Solyndra's problems came to a head in November 2010 when it told the Energy Department it needed $150 million to make it through early 2012, at which time it believed its cash flow would improve. On Dec. 1, 2010, it was unable to make a $5 million payment to its subsidiary and technically defaulted on its loan.

The loan was officially restructured in February 2011, giving the company enough money to carry it through August. The company, which had drawn down $475 million of the U.S. loan as of Dec. 31, 2010, ended up borrowing $527 million before its bankruptcy.

Rep. Cliff Stearns of Florida, who is heading the Republican congressional investigation into the company, said, "Solyndra ran out of cash in December 2010, yet DOE continued to ignore the red flags and astonishingly doubled down on a bad bet and restructured the loan, further putting taxpayers at risk for what could now be a half billion dollars."

Concerns about the program and its risk controls were raised several times by the Energy Department's inspector general, Gregory Friedman. In a March 2011 report, Mr. Friedman said his office "found that the Loan Guarantee Program could not always readily demonstrate, through systematically organized records, including contemporaneous notes, how it resolved or mitigated relevant risks prior to granting loan guarantees." A report in 2009 also faulted the loan-guarantee program's controls.

There are also questions about whether the Obama administration should have known about Solyndra's problems even before the loan guarantee was made. In a previously undisclosed Sept. 9 report, the Congressional Research Service said that by the time of the September 2009 guarantee one of the company's key advantages—the fact it didn't use high-priced polysilicon as competitors did—had disappeared.

Polysilicon cost more than $400 per kilogram in 2008 but dropped to slightly more than $50 per kilogram in September 2009, the report said.

White House officials received assurances from Solyndra as recently as May 2011 that its finances were solid, with the company dismissing concerns raised in media reports. Mr. Silver, in a radio interview in May, said Solyndra was employing more workers than in 2009 and added: "The story has been a little bit misunderstood."


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