Fri 11/06/2020 05:29 AM
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China Orient Asset Management (International) has engaged Allen & Overy and Alvarez & Marsal to explore legal options in relation to a defaulted $140 million mezzanine loan to Chinese textile conglomerate Shandong Ruyi Technology Group after having appointed A&M as a receiver over Ruyi’s shares in its wholly-owned subsidiary Forever Winner International Development earlier this year, according to four sources familiar with the matter.

One of the options on the table is to appoint a provisional liquidator over Forever Winner through a winding up action in Hong Kong with a view to take control of the entity’s assets in order to forestall potential actions by other creditors, especially considering that another creditor Hang Seng Bank is now suing Forever Winner for over $123 million in defaulted debt, the sources said.

Wilkinson & Grist has been separately hired by A&M in its capacity as the receiver over Forever Winner’s shares, the sources said.

At the centre of the dispute between Orient and Ruyi is a $140 million junior mezzanine loan provided by Orient through a wholly owned subsidiary Sino Power Resources Inc. to Ruyi International Fashion (China) Financial Investment Holding Group Limited according to the sources.

As reported, the facility has a subordinated guarantee and a second ranking share charge over Ruyi International Textile Development’s 84% stake in Ruyi Textile and Fashion International Group, which is the Hong Kong holding company of Lycra Company. It is also backed by Shandong Ruyi Technology Group’s shares in Forever Winner as well as European Topsoho, the holding company of SMCP according to the sources.

Christopher Gilbert and Yeung Mei Lee of A&M were appointed as joint and several receivers and managers over the entire issued shares of Forever Winner in February according to the company’s Hong Kong annual return filing although reference to the appointment was later removed in a new filing in June, both reviewed by Reorg. Sources said Orient has taken control of the entity after accelerating the underlying mezzanine debt but discussions are otherwise still ongoing between the two parties.

Orient, A&O, A&M, Wilkinson and Shandong Ruyi did not immediately respond to Reorg’s requests for comment.

As reported, Forever Winner was sued by Hang Seng Bank in the Hong Kong High Court earlier this week over defaulted debt facilities totalling HKD 549.1 million ($70.8 million) and $52.1 million.

The action by Hang Seng Bank against Forever Winner, which is also an initial subsidiary guarantor of Shandong Ruyi’s $300 million 6.95% senior notes due July 5, 2022, is likely to trigger the cross default provision under the offshore notes, which would provide noteholders with the ability to accelerate the notes, should they meet the 25% acceleration threshold.

Some major noteholders have retained legal advisors to consider their options but the notes have yet to be accelerated according to sources. Meanwhile, Zerobridge Partners, which was previously a financial advisor to Ruyi in relation to its offshore capital structure and fundraising, has been approaching the company’s offshore creditors, as reported.

Forever Winner International Development is a Hong Kong-based textile supplier wholly-owned by Shandong Ruyi. It was previously reported by Nikkei in March that Japanese clothing company Renown - also controlled by Ruyi - suffered consecutive losses because it could not collect outstanding debt from Forever Winner, which acquired cotton and textiles from Renown and then resold the material into China. Renown later declared bankruptcy and entered into liquidation, according to media reports.

As reported, the Hong Kong company held a 50% stake in a coal-fired power plant in Pakistan, which was a joint venture with China Huaneng Group before the stake was sold to an entity of Shandong-based state-owned enterprise Jining Chengtou Holding Group in April for RMB 2.053 billion. Ruyi later used the funds to repay an onshore bond due in October.

Forever Winner also owns an entire floor of Hong Kong’s Bank of America Tower which was mortgaged to Hang Seng Bank in 2018, in addition to a second mortgage with HSBC in 2019 according to corporate filings. The property was purchased for HKD 701.8 million in 2018 according to media reports at the time.

Corporate records also show that Forever Winner has recently in April pledged certain receivables owed by Trinity Limited and Trinity International Brands Limited to Hang Seng Bank in relation to a bank facility originally signed in 2019. Trinity is a Hong Kong listed menswear retailer controlled by the holding company of Shandong Ruyi.

Possible Winder?

Assuming that China Orient through Sino Power, as the lender under the mezzanine loan benefits from Shandong Ruyi Technology Group pledging the shares it holds in Forever Winner - this appears to be the case given the February annual return filings and the appointment as A&M as a receiver over these shares according to that same filing - then this may potentially allow China Orient to petition for the winding-up of Forever Winner in the Hong Kong court.

The court can consider multiple grounds for a compulsory winding-up, including by special resolution, that the company is unable to pay its debts, or that the court is of the opinion that it is just and equitable that the company be wound up.

An automatic stay of proceedings and actions against the company apply once a winding up order is made by the court.

Provisional Liquidation

Provisional liquidators can be appointed between the time a winding up petition is submitted and when a winding up order is made -- to preserve the assets of the company in the period in between.

Once a provisional liquidator is appointed, a moratorium is triggered and no proceedings or action can be taken against a company without the leave of the court (subject to secured creditor carve out).

Current Hong Kong case law sets out that for provisional liquidators to be appointed, in addition to filing a winding up petition, there also needs to be evidence that the appointment is required to carry out an independent investigation of a company - for example due to a lack of integrity in the company’s management - or safeguard against the dissipation of a company’s assets.

In terms of any potential restructuring it should be noted that the decision in Re Legend International Resorts [2006] 2 HKLRD 192 effectively resulted in Hong Kong provisional liquidators not being able to be appointed on a ‘light touch’ basis to restructure a company - as is the case in the Cayman Islands, British Virgin Islands and Bermuda - but rather their appointment must be solely for purposes of a winding up and asset preservation.

However, in Re China Solar [2018] HKCFI 555 the Hong Kong court clarified the position noting that although the court may only appoint provisional liquidators on conventional grounds of asset preservation and investigation, given the right circumstances - including strong creditor support - provisional liquidators may be given additional powers to restructure a company. This approach has been subsequently followed in further cases such as Re CW Advanced Technologies Ltd [2018] HKCFI 1705 and Hsin Chong Group Holdings Ltd [2019] HKCFI 805.

Below is the capital structure of Ruyi:

Click HERE to enlarge

Corporate structure:

Click HERE to enlarge

--Simon Lee, Stephen Aldred, Shirley Li
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