Convertible bonds issued by Chinese solar-panel makers are handing investors the steepest losses in almost three years as overcapacity causes product prices to tumble, wiping out earnings and putting credit ratings at risk.

Declines in the securities were as much as three times the average for those in the United States as Shanghai-based JA Solar Holdings Co reported a bigger second-quarter loss than analysts forecast and LDK Solar Co, based in Xinyu, south China, reduced its revenue estimate.

China, the world's biggest maker of solar panels, set tariffs on August 1 to spur use of the technology at home in a bid to cut the nation's reliance on oil imports. Germany and Italy have also cut solar power subsidies that made them the biggest markets in the world for the panels, curbing exports for Chinese manufacturers.

"Some of these losses are justified by massive leverage and falling prices," said Jonathan Stanford, who manages US$1 billion at Arkos Capital SA in Lugano, Switzerland and doesn't hold the securities. "It's very difficult to judge demand, while supply is just rocketing."

JA Solar's 4.5 percent dollar-denominated convertible due May 2013 posted a 9 percent loss this month to yield 15.1 percent last Wednesday, according to Trace, the price reporting system of the Financial Industry Regulatory Authority.

Wuxi-based Suntech Power Holdings Co's 3 percent note due March 2013 lost 24 percent to yield 34 percent. Those are the biggest drops since October 2008 and compare with an 8.2 percent loss for debt in the US that can be exchanged into shares, according to a Bank of America Merrill Lynch index.

LDK's 10 percent yuan-denominated conventional bond due February 2014 has slumped 24 percent this month, almost doubling its yield to 27 percent, based on Credit Suisse Group AG prices. The world's largest maker of silicon solar wafers was named in a July 11 report by Moody's Investors Service that warned of "accounting risks" at Chinese issuers. A week later, the company said the chairman of its audit committee resigned, while the head of a similar body at Changzhou-based Trina Solar Ltd quit on July 10.

Corporate governance concerns have contributed to bigger losses in securities issued by China's solar companies compared with competitors based in the US and Europe.

Investors lose

Investors lost 5.3 percent in August holding the 6.5 percent convertible bonds sold by Oslo-based Renewable Energy Corp, according to data compiled by Bloomberg News. Missouri-based MEMC Electronic Material Inc's 7.75 percent regular bond due in April 2019 dropped 1.1 percent.

Renewable Energy, a maker of solar-power components, said last Thursday it had extended a shutdown of plants in Norway until the end of the year because of weak demand. MEMC, which makes silicon wafers, said in July it was paid US$120 million by Suntech to cancel a 10-year supply contract. Suntech is the world's biggest producer of solar panels.

Production of solar modules has exceeded demand every year since 2005, according to data compiled by Bloomberg New Energy Finance.

The average selling price for Chinese crystalline silicon modules, a global benchmark, averaged about US$1.30 per watt in the first half of August, down from US$1.78 in 2010, US$2.30 in 2009 and US$4 in 2008. California-based Applied Material Inc, the No. 1 producer of equipment used to make solar panels, said on August 11 that prices may slide a further 20 percent in six months.

"Prices for solar companies are volatile," Li Yi, chief executive officer at Hong Kong-listed Trony Solar Holdings Co, said in an August 22 interview. "When subsidies were reduced or delayed in the US and Europe in the first half, it led to inventory problems and pressured selling prices."

US tax credits for wind, solar and geothermal projects end next year and in 2016, and subsidies for renewable energy are expected to decline 77 percent over the next five years, according to the White House Office of Management and Budget.

Bigger loss

JA Solar, the biggest solar-cell producer, reported on August 18 a US$35.4 million second-quarter loss that was equivalent to 22 cents a share, worse than the 19.5 cent-median forecast in a Bloomberg News survey. LDK Solar cut its 2011 revenue forecast on the same day to a range of US$2.5 billion to US$2.7 billion, from US$3.5 billion to US$3.7 billion, and said it would write down US$60 million of inventory.

Standard & Poor's put LDK Solar's B+ rating, the fourth-highest junk grade, on watch for downgrade last Wednesday, while Fitch revised the company's rating outlook to negative from stable the following day. Evergreen Solar Inc and Spectrawatt Inc, both US-based producers, filed for bankruptcy protection this month, citing falling prices and competition from Chinese makers.

Chinese demand is seen as a solution to the industry's woes. Policymakers are supporting investment in solar power plants at home after industrial companies' profits slumped in 2008 as crude oil reached a record US$147.27 a barrel. Crude averaged US$96.85 in New York trading this year, 24 percent more than in the same period of 2010.

The government set electricity tariffs for solar projects this month, ensuring higher prices than were achieved in competitive bidding in 2010.

The measures will create annual demand for 9 gigawatts of photovoltaic cells by 2015, compared with an estimated 1.5 gigawatts for 2011, according to Stephen Zhang, a Beijing-based analyst at China International Capital Corp, the nation's biggest investment bank. Installed capacity will rise to 27 gigawatts then, making China among the three biggest solar markets, Zhang wrote in a research note on August 1.

China's measures mean the industry's convertible bonds are becoming more attractive, Roland Hotz, a fund manager in Zurich at Fisch Asset Management AG, which manages US$6.8 billion of assets, said in an interview on August 22.

"The convertible bonds offer very good yields in a very compelling environment," said Hotz, who bought notes issued by JinkoSolar Holdings Co, based in Shangrao, south-central China, this month and sold JA Solar's securities. "There may be some consolidation and some patience is needed, but the future for these companies is good."

The cost of insuring China's sovereign debt is headed for a fourth monthly rise, credit default swaps show. Five-year contracts have climbed 39 basis points in August to 126, according to CMA, which compiles prices quoted by dealers in the privately negotiated market.