Dr. Peng in Talks With Major Bondholders to Delay $67.6M March 1 Mandatory Redemption

Relevant Document:
Consent Solicitation Memorandum

Chinese telecom company Dr. Peng Telecom & Media Group and its financial advisor Alvarez & Marsal are negotiating with major holders of its restructured $500 million 7.55% senior notes due Dec. 1, 2021, to potentially postpone the next $67.6 million mandatory redemption, scheduled for March 1, said two sources with knowledge of the matter. Continue reading as our Asia Core Credit by Reorg's team analysis of Dr. Peng's ongoing negotiations with noteholders and request a trial for access to the linked documents as well as our analysis and reporting on hundreds of other stressed, distressed and performing credits in the region.

The request came after Dr. Peng unexpectedly terminated an RMB 2.3 billion ($355.2 million) sale of its data center assets in December, which Dr. Peng said was due to the fact that the prospective buyer Jinquan Yuanhe Investment’s shares were frozen, affecting its operation.

As reported, Dr. Peng later disclosed in a stock exchange filing that it was seeking financing or new buyers in order to refund $250 million sale proceeds collected in May last year to Hong Kong-based Pins International, Jinquan Yuanhe’s partner in the deal.

Requesting to delay the next mandatory redemption, Dr. Peng told bondholders that it was because the company would not be able to collect the roughly $82.9 million remaining sale proceeds, which were intended to fund the March redemption, the sources said.

Meanwhile, noteholders are requesting clarity on the termination of the deal and the company’s cash flow since the senior notes were restructured right before its original maturity in June last year, a third source with knowledge said, who added that there has been a lack of transparency and disclosure from the company.

Dr. Peng Telecom did not respond to a request for comment by press time. A&M declined to comment.

The original buyer Jinquan Yuanhe is an investment platform focused on the technology, media and telecom, and new infrastructure and pharmaceutical industries, according to its website. Public records show that the company’s shares were frozen by Lvliang Public Security Bureau in September of last year for unspecified reasons, while its stakes in several subsidiaries were also frozen by the authority.

Under the original sale and purchase agreement as announced in April last year, Dr. Peng was to sell its data center assets to Jinquan Yuanhe and its partner Pins International, an entity wholly owned by Vienna Insurance Group with a registered share capital of 1 Hong Kong dollar, while the seller would continue to manage and operate the facilities.

According to the filings, most of the target assets have been transferred to Jinquan Yuanhe in return for payments from Pins International, while the assets were then pledged back to Pins. Dr. Peng also pledged its 27.7% stake in a company listed on the OTC platform Shanghai Equity Exchange to the Hong Kong entity as part of the deal.

Sources familiar with the matter noted at the time that the sale resembled cross-border bridge loan transactions that were structured in a way that would obviate the need to obtain foreign exchange approval.

The transaction was questioned by the Shanghai Stock Exchange at the time, which in an inquiry letter asked Dr. Peng to explain whether it was in fact a financing arrangement, an allegation that the company denied saying it was an asset transfer by nature.

Dr. Peng has said that it aims to finalize the terms of the termination and enter into a binding agreement with the counterparties by Jan. 30. Meanwhile, Dr. Peng intends to pledge the data center assets to Pins after they are returned by Jinquan Yuanhe.

The $500 million notes originally due June 1, 2020, were restructured through a consent solicitation to extend the maturity to Dec. 1, 2021. About $257.6 million notes remain outstanding after a 20% upfront payment and a 20% mandatory redemption on Oct. 1, 2020. The October payment was about 10 days late, which was likely due to delays caused by China’s National Day holiday, as reported.

Dr. Peng is in the process of raising RMB 2.207 billion through a share placement to three connected parties, which would be ultimately funded by the Chinese telecom company’s controlling shareholder Shenzhen Pengbo Industry. The proposed transaction will increase the stake of chairman Yang Xueping in Dr. Peng to 29.6% from 12.7%.

Dr. Peng’s capital structure is listed below: