Battle over Asia Aluminum's Debt Plan

飞雪寒冰

On February 13，Asia Aluminum, Asia’s largest manufacturer of aluminum extruded products, along with parent AA Investments Co. (AAI), made a tender offer for buying back all of its outstanding bonds having an aggregate face value of US$ 1.2 billion.



The troubled company, based in the Zhaoqing city in southern province of Guangdong, offered 27.5 cents on the dollar for high-yield bonds and 13.5 cents for payment-in-kind notes (PIK).



Asia Aluminum, controlled by its founder chairman Kwong Wui Chun, said restructuring its debt was imperative and if holders of its debt rejected the offer, the company may have to opt for bankruptcy, which will further hurt investors.



Debt holders were furious over the tender offer and dubbed it a low-ball offer. They complained of inadequate financial disclosure and some even accused the company of fraud.


Subsequently, on March 16, the company stunned investors by suddenly withdrawing the buyback plan and initiating liquidation proceedings, saying the local government had withdrawn the promised financing for the debt offer.

Along with Asia Aluminum, its parent AAI and a wholly owned subsidiary China Steel Development Co. also started provisional liquidation proceedings.



Asia Aluminum is only one of many companies facing disputes with creditors amid the sharp global economic downturn. However, foreign investors are especially aggrieved in this case, seeing it as a test of fairness to overseas investors on part of mainland companies facing big declines in earnings.

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Buyback Offer



Many were surprised by the sudden collapse of Asia's largest aluminum extruded products manufacturer.



Asia Aluminum owns a production complex in the Dawang High-tech Development Zone in Zhaoqing city, Guangdong Province, which has an annual capacity of 310,000 tons. According to the company's unaudited results, its revenue in the fourth quarter of 2008 was HK$ 1.4 billion, with a net loss of HK$ 105 million. At the end of 2008, the company had cash and bank deposits totaling HK$ 702 million. Its total assets were HK$ 18.9 billion with liabilities of HK$ 11.8 billion. The company's financial situation was not on the verge of bankruptcy.



According to the company, local government and banks will provide financial support only if debt holders accept the buyback offer, while a person from China Construction Bank, one of the company's major lenders, told Caijing that the bank had never pushed the company to buy back its bonds as a condition for new loans. "The buyback plan was proposed by the company itself," said the bank staff.



Damien Wood, analyst at Credit Suisse Asia, said Asia Aluminum may have some liquidity problems, but the major issue which shareholders want to resolve was its huge liability. It looks like a situation where "the company wants its bond holders to pay for its business mistakes."



Asia Aluminum is eagerly seeking a debt restructuring, even at the cost of part nationalization implied by entry of the Zhaoqing government into the company as a shareholder.



According to the company’s buyback plan, chairman Kwong Wui Chun's stake in the company would be reduced from 97 percent to 30 percent after the buyback, though he would remain the controlling shareholder. The Zhaoqing government would have a 25 percent stake in exchange for the financial support. The company's management team would hold another 10 percent while its partner Orix holds 14 percent. The remainder 18 percent would be sold to other investors, according to Kwong.

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However, the plan has been widely criticized for ignoring bond holders' interests. “Moreover, the move to induct the government into the company also raised concern among foreign investors,” said David Kidd, a lawyer from U.S. law firm Allen & Overy.



Sami Caracand, an investor who holds 5 percent of the company's high-yield bonds, said "the company's operations lack transparency. It seems that they conspired to make investors pay for the losses."



What raised more suspicion was that even when Asia Aluminum claimed a liquidity crisis, it never stopped investing. During the second half of 2008, it spent HK$ 3.8 billion to buy land, equipments and plants.



In November, the company acquired 50 percent stake in an aluminum refining plant in Guangxi, and 85 percent interest in four mines, for 1.15 billion yuan, through its unit Asia Pacific Aluminum, which is indirectly held by Kwong's son Kong Haifeng.



"Investment in the refining project while being under liquidity pressures fueled suspicions that the company was transferring capital," said a bond holder.



In response, Kwong said the investment followed "government's requirement".



Bond holders formed an organization in March to oppose the buyback deal. They blamed the company for inadequate financial disclosure as it had stopped regular releases of operational situations since last November. Financial data provided in the buyback offer were also unaudited.



The company hasn't released its half yearly financial results, which should have been issued within 45 days after December 31. Moreover, it also failed to provide the related collaterals to bond holders for its newly acquired project, in accordance with the PIK contracts. "We can sue the company if we strictly follow the contract and the laws," said a PIK investor.

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Expansion Efforts



High liabilities and risks have long been the hallmarks of Asia Aluminum's growth strategy.



Asia Aluminum was established by Kwong in 1992 in Nanhai, Guangdong Province, which has been a major aluminum extrusion production base in China. A person close to Kwong told Caijing that "Kwong was ambitious and insightful," and he has made Asia Aluminum a leading player and a role model for its counterparts in the industry.



In the late 1990s, Asia Aluminum ranked among the top five of more than 100 aluminum companies in Nanhai. It was the first one to list in Hong Kong in 1998. "He (Kwong) understands the capital market much better than others," said a industry insider in Nanhai.



In 2003, Kwong decided to move the company's production base from Nanhai to Zhaoqing amid the boom in China's construction industry. The production complex started operations by the end of 2006 with an annual capacity of 400,000 tons of aluminum rolled products and 300,000 tons of aluminum extruded products.



To fund the capacity expansion, in December 2004, Asia Aluminum raised US$ 450 million by issuing high-yield bonds due 2011 in Hong Kong.



Though book value of Asia Aluminum at that time was only HK$ 2.8 billion, the issue still attracted many investors, including Fidelity Investments and Schroeder and Pioneer.



Annual interest outgo of HK$ 91 million has dragged down Asia Aluminum’s performance since then. In 2005, the company's net profit was HK$ 166 million, down 26 percent from a year earlier.



The company's planned aluminum rolled products project was delayed and its cost soared. As of July 2007, investment in the project grew to 6 billion yuan, from the previously estimated 3 billion yuan, putting liquidity under even greater strain.

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In 2006, Kwong decided to privatize the company and de-list from Hong Kong stock market.



Kwong offered a total of HK$ 3 billion to other shareholders. To fund the deal, parent company AAI, 97 percent controlled by Kwong, issued HK$ 4 billion worth PIK notes in May 2006, due in 2012. These are the notes the company tried to buy back this February.



Subscribers include Merrill Lynch, Och-Ziff Capital Management Group and STARK. An investor told Caijing that investors were attracted to the company's PIK notes because of the outlook for its aluminum rolled products project, and the company’s promise that it would re-list in 2008 or 2009 after the project starts operations.



In mid-2007, Asia Aluminum started preparing for re-listing. However, the sudden economic downturn waned the effort. And with the increasing pressure on liquidity, the company finally launched the buyback plan.

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Liquidation



On March 16, Asia Aluminum suddenly withdrew the buyback offer and entered provisional liquidation proceedings. "The news was astonishing," said a bond holder of the company.



However, liquidation may actually provide an opportunity to investors to recoup some of their losses. Earlier, company chairman Kwong also said that "liquidation may grant the company a chance to survive."



Like many overseas registered companies, Asia Aluminum’s assets in the mainland are independent legal entities, which means they can be excluded from liquidation proceedings. If AAI and its two wholly-owned subsidiaries declare bankruptcy, PIK investors will still have the right to the company's stakes in its mainland assets.



Kwong said after the liquidation announcement that "stakes will not be sold to foreign investors. I have to ensure China-based companies operate in normal." However, he didn't clarify how he would propose to block foreign bond holders from getting stakes in the mainland companies.



The local government's attitude toward Asia Aluminum has been vacillating. It had earlier promised to grant financial support to the company since it employed more than 10,000, but later decided to withdraw after accusations of conspiracy to cheat investors.



On April 1, foreign bond holders applied to the Hong Kong High Court for appointment of Asia Aluminum Manufacturing Co. as the provisional liquidator of Asia Aluminum.


"The Asia Aluminum case will test the execution and implementation of laws. It will also test Chinese companies' reputation in international capital market," said a creditor of the company. "We don't want to see the company go to bankruptcy, we hope to discuss with the management team and local government, as well as banks, to seek a solution."

Minson

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