Lycra’s Ad Hoc Bondholder Group Seeks Clarity on Ruyi-Huayang Joint Venture

An ad hoc bondholder group of U.S. spandex manufacturer Lycra Co. has sent legal letters through its legal advisor Milbank seeking clarity on a joint venture between Lycra’s Chinese parent company, Shandong Ruyi Technology Group, and state-owned Huayang New Material Technology Group, said three sources with knowledge of the matter. Continue reading for our Asia Core Credit  and EMEA Core Credit teams' analysis of Lyrca Co. bondholders seeking clarity over a joint venture between Shandong Ruyi Technology Group and Huayang New Material Technology Group and request a trial for access to our coverage of thousands of other stressed/distressed debt situations in the region. 

In particular, the bondholders are concerned about suspected, unauthorized use of Lycra’s intellectual property and potential technology transfer as Ruyi began construction of a new production plant with Huayang as part of a strategic partnership signed last October that is said to be going to leverage Lycra’s branding and technology, the sources said.

Lycra’s bondholders were not provided any information about the structure and valuation of the deal, from which Ruyi had previously told its onshore bondholders that it would receive RMB 2.5 billion ($384.1 million), the sources said, adding that the company has yet to respond to the bondholders’ inquiries.

Huayang, a coal miner-turned new material manufacturer controlled by the Shanxi provincial government, signed a framework agreement in October with Ruyi, under which the parties will develop fiber material manufacturing facilities in Yangquan, Shanxi province, including a 60,000 tonnes per year Lycra spandex production line by December 2021 and a 350,000 tonnes per year differentiated polyester fibre production line by September 2022. Upon completion, the joint venture will generate an annual operating revenue of RMB 18.6 billion and net profit of RMB 3.2 billion, while creating 5,000 local jobs, according to a press release at the time.

As reported, Ruyi had told its onshore bondholders at the time that the partnership aimed to ultimately list Lycra on China’s STAR board, with Huayang providing RMB 2.5 billion to Ruyi in exchange for an equity interest in the U.S. spandex company. As part of the deal, Ruyi and Lycra will also provide Huayang with RMB 3 billion worth of intellectual property rights and RMB 7 billion worth of offtake contracts, according to a source with direct knowledge of the transaction at the time.

Lycra’s ad hoc bondholder group was recently alarmed by the fact that Ruyi said it had received part of the RMB 2.5 billion proceeds from the partnership, prompting the ad hoc group to question whether any intellectual properties such as patents or other assets held by Lycra had been sold by its Chinese parent.

The concerns also came as Ruyi and Huayang jointly set up an entity called Lycra International Biotechnology Co. Ltd. (莱卡国际生物科技有限公司) in January with a registered capital of RMB 2 billion to coordinate the construction project. The joint venture is indirectly held 70% by Huayang and 30% by Lycra’s onshore holding company, Shandong Ruyi Lycra New Material Technology (山东如意莱卡新材料科技有限公司), which was formerly known as Jining Ruyi Fiber.

As reported, in exchange for the continued forbearance of its onshore creditors’ committee led by ICBC, Ruyi had repaid all overdue bank loan interest before the Chinese New Year which according to sources, was funded by proceeds received from Huayang.

Ruyi had previously said the remaining proceeds would be used to repay overdue interest under its two defaulted onshore notes, the RMB 1 billion due 2022 “19 Ruyi Tech MTN001” and RMB 1 billion due Dec. 14, 2020, “17 Ruyi Tech MTN 001,” but Ruyi stopped short of providing a payment timeline.

Meanwhile, it is also unclear whether a roughly RMB 20 million amortization payment due March 18 under its extended RMB 1.5 billion 7.9% corporate bond due 2023 “18 Ruyi 01” will be made this week as previously promised.

Ruyi recently told some onshore bondholders that it is now looking to float Lycra on the Hong Kong stock exchange instead of the Shanghai tech board, but very little information has been provided and bondholders remain sceptical about the genuineness of the listing plan, which has been mulled since 2019, two onshore bondholders said.

The Chinese textile company plans to hold a creditors’ committee meeting in the near term to extend its bank debt, while committee chair ICBC is expected to present a debt-to-equity swap proposal that may involve shares in Lycra, according to the sources.

Offshore, Ruyi has been embroiled in several lawsuits after defaulting on a $400 million senior mezzanine loan arranged by Credit Suisse and a $140 million junior mezzanine loan owed to China Orient Asset Management Co.

Both facilities are secured by shares of Lycra’s Dutch holding companies, Eagle Ultimate Global Holding BV and Eagle Super Global Holding BV, and 84% of their Hong Kong parent Ruyi Textile and Fashion International Group, as reported, meaning any debt-to-equity swaps or public listing onshore would be unfeasible without first resolving the offshore defaults at the levels below, sources noted.

As reported, Lycra’s ad hoc noteholder group, which is advised by Milbank and Moelis, holds more than 50% of the company’s dual-tranche $690 million 7.5% notes due May 1, 2025, and €250 million 5.375% due May 1, 2023.

Lycra is advised by PJT Partners and White & Case, as reported.

Milbank and Moelis declined to comment. Lycra did not immediately respond to an emailed request for comment.

Lycra’s capital structure is below: