Thu 05/30/2019 22:39 PM
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Relevant Documents:
Oct. 2017 Offshore Offering Circular
Dec. 2018 Onshore Bond Offering Circular (Chinese)
2018 Annual Report (Chinese)

Shandong-based coal and logistics company Zhongrong Xinda Group has been listed as a judgment debtor by the Beijing Higher People’s Court, according to a May 16 filing on China’s enforcement information disclosure website, increasing investor concerns about the company’s liquidity problems after it was put on credit watch by an onshore rating agency last month.

Court documents reviewed by Reorg show that Zhongrong Xinda has been sued in several financial disputes and assets have been frozen, including entire stakes in major operating subsidiaries, since the company’s onshore and offshore bonds were sold down in July last year amid concerns that the default of its business partner Wintime Energy would impact Zhongrong Xinda’s operations.

The latest lawsuit was filed by Pingan Securities at the Beijing Higher People’s Court on Apr. 20 in relation to an unspecified contract dispute, with the court granting a freezing order over bank deposits amounting to RMB 521.9 million ($75.5 million) or other assets of equivalent value before a trial commences.

Meanwhile, the holding company’s entire stakes in major operating subsidiaries including coking coal operators Shandong Coking Group Foundry Coke and Shandong Tiexiong Metallurgical Technology, logistics and trading unit Shandong Logistics Group and investment arm Zhongrong Financial Holding (Qingdao) Group, have also been frozen by different courts since Wintime’s default in July, according to corporate records on the National Enterprise Credit Information Publicity System.

Zhongrong Xinda previously disclosed in an onshore bond offering circular dated Dec. 20, 2018 that it was involved in ongoing contractual disputes totalling RMB 600 million. As of the date of the OC, the company said it had settled with DBS Bank regarding its demand to accelerate a RMB 299.98 million loan, while it would negotiate a settlement with Shanghai Pudong Development Bank (SPDB) on a separate loan acceleration suit in the amount of RMB 100 million. Court filings show that Zhongrong Xinda breached certain covenants under the loan from SPDB in July last year after collateral deposits amounting to RMB 20 million were frozen by a court, and was subsequently sued by SPDB for failing to repay when the loan was accelerated.

Zhongrong Xinda’s $500 million 7.25% due Oct. 26, 2020 senior notes have been under pressure since coal mining company Wintime Energy defaulted on a RMB 1.5 billion onshore bond in July 2018. Wintime Energy’s controlling shareholder Wintime Group is a minority shareholder in three Zhongrong Xinda subsidiaries including Shandong Logistics and Zhongrong Financial and guaranteed some of Zhongrong Xinda’s debts. Wintime’s default triggered Zhongrong Xinda’s offshore notes to plummet to the 50s at the time, noted three buyside sources.

The notes bounced back to the 60s after the company said in a statement that it did not have existing guarantee arrangements on Wintime’s debts on July 20, but have since lingered in the mid to high 60s area.

Investors’ concerns have been heightened after Zhongrong Xinda’s onshore bonds were placed on credit watchlist in April by Lianhe Credit Rating, which noted that the company’s financing ability has been hindered by “negative rumours around the company as well as legal disputes”. Delay in the development of a major mining project in Peru as well as failure in disposing of any of its financial assets in 2018 have also affected its debt servicing ability, the agency said in its report.

Sources Reorg has talked to in particular expressed concerns over the liquidity of Zhongrong Xinda’s financial assets amounting to RMB 8.57 billion held for sale, which included at least eight equity investment funds or partnerships as of end-2018. The sources noted that the company had not been transparent with what assets were held by these funds, nor its disposal plans.

The RMB 68.4 million valuation of the company’s iron ore mine Pampa de Pongo in Peru were also called into question by investors. The mining asset consists of 39 mining concessions covering a total area of 263 sq. km. and was first acquired by the company in Apr. 2016 for just RMB 5.52 billion, but Zhongrong Xinda then in December that year sold a 20% interest in Zhongrong Xinda (Qingdao) Mining Resources, which indirectly held the asset, for RMB 10 billion.

Zhongrong Xinda said in an 2017 OC for its $500 million 7.25% due Oct. 26, 2020 senior notes that the valuation of the Peruvian mine, which accounted for over 40% of total assets as of end-2018, was provided by Beijing Northern Yashi Assets Appraisal based on reserve exploration of 15 mining concessions, but sources noted that the project still requires significant capital expenditure on infrastructure such as road access and a planned shipping port. There is also great uncertainty as to when the mine can become operational, the sources said, especially since a $2.692 billion partnership with Jiangxi Copper to jointly develop the mine appears to be stalled after it was first announced in July. The announcement said at the time that a joint venture 51% owned by Jiangxi Copper would invest $2.692 billion in construction and operation, but such joint venture has yet to be set up according to both companies’ latest annual reports.

B- rated Zhongrong Xinda was previously removed from Rating Watch Negative by Fitch in December due to improving liquidity after repaying RMB 4.8 billion of onshore bonds and issuing another RMB 2.5 billion that month.

Capital structure is as below:
 
 
 
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