On the face of it, Asia Aluminum’s travails appear to be no more than a symptom of the downturn in China’s construction industry. The company, which makes aluminium extrusions for high-rise buildings, has suffered from a decline in demand and was placed in the hands of provisional liquidators in March. At the centre of the restructuring though, is a group of angry foreign bondholders being denied access to their investments. A failure to retrieve these could damage the reputation of the country’s investment climate.
In 2006, the company’s chairman Kwong Mui-Chun needed US$500 million to take the company private. Unfortunately, the company only had a market cap of $350 million as well as $450 million of outstanding high-yield debt. It overcame this with a wrap-around financing which left the existing bonds alone but would generate enough interest from investors to raise the cash.
Things went wrong though, following the financial crisis in September 2008, when the company found it hard to service the debt that it had incurred as part of the buyout. On February 13 it offered to buy back its $450 in high-yield bonds for 27.5 cents to the dollar and the $737 million payment in-kind notes for only 13.5 cents to the dollar. Investors who agreed to tender before a certain deadline were also offered a so-called ‘early bird’ rate of an extra 5 cents.
Only a third of the international note holders agreed to this and most objected to the poor terms and lack of disclosure on the company’s part. Under the plan, chairman Kwong Mui-Chun, who owns 97% of the equity, intended to remain in charge of the company. But the offer was rejected and the company was taken over by provisional liquidators on March 16. It was assumed the process would be run under China’s Enterprise Bankruptcy Law but instead the company is being restructured privately. On May 7, the company’s investors, mostly hedge funds, hired KPMG as their receivers, in the escalating battle to protect their rights.
While the restructuring is ongoing, the real issue now is whether the foreign debtholders will be able to reclaim their assets. Because the assets are in China, but many of the investors are in Hong Kong and are debt investors not equity, it will be difficult gaining access to assets in a holding company structure. Onerous onshore restrictions meant many foreign investors invested through offshore structures. But with an ease of entering comes a difficulty in exiting. Bondholders are debt creditors of the company’s offshore company so they have fewer rights to their assets than their onshore counterparts and have no creditor rights to discuss a restructuring.
There will be severe repercussions if the investors are not treated fairly. This case is being keenly watched to see how foreign investors are dealt with in a downturn. If the company redistributes assets then banks and hedge funds will be reassured. If it does not, then foreign direct investment (FDI) may falter. It has already dropped dramatically. On May 16, China’s Ministry of Commerce announced that FDI into China had decreased by 22.5 per cent year-on-year in April. And the result of the Asia Aluminum case could severely test future FDI figures.