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ANALYSIS

US Private Equity firm, HK shipping titan may split in asset battle

Titan Petrochemicals and Warburg Pincus came together in a multimillion-dollar deal five years ago but are now fighting to retain control of a prized joint asset

PUBLISHED : Monday, 13 August, 2012, 12:00am
UPDATED : Monday, 13 August, 2012, 10:12am

A five-year asset marriage between United States private equity firm Warburg Pincus and fuel supply and logistics group Titan Petrochemicals, founded by Fujian businessman Tsoi Tin-chun, is close to ending in a divorce.

As with so many failed marriages, the squabbling over a division of assets has been going on behind the scenes for months. And, in the meantime, each side has found a new partner who is eager to lay their hands on the spoils.

Back in March 2007, Warburg signed a deal to pay Titan US$175 million for an 18 per cent stake in the group, plus a 49.9 per cent stake in China StorageCo, a fuel storage joint venture set up with Titan which owned the balance of the shares. Titan contributed onshore storage facilities while Warburg injected funds into the venture.

The deal helped debt-laden Titan lower its financing costs, since it borrowed US$400 million in 2005 by selling bonds that carried a hefty interest rate of 8.5 per cent. It also helped fund StorageCo's planned US$1 billion capital outlays on four onshore fuel storage projects.

Warburg chose to put most of its money in StorageCo, in which it bought convertible preference shares and convertible notes totalling US$210 million. It also bought US$40 million of convertible preferred shares in parent firm Titan.

That proved to be a shrewd move. The storage operations turned out to be the only bright spot for Titan Petrochemicals, generating pre-tax profit of HK$50.6 million last year, compared to a profit on the group's fuel supply business of just HK$3.1 million, a loss on offshore fuel storage of HK$133.8 million, a loss on oil transport of HK$191.8 million, and a loss on shipbuilding of HK$213.6 million.

The 2008-09 global financial crisis took a heavy toll on the health of the group's oil trading and transport industry and in December 2009, Titan was forced to restructure US$315 million of convertible bonds issued in 2005. After sweetening the offer terms twice following insufficient support from bondholders, it managed to complete the restructuring in July 2010.

To further lighten its debt load and raise funds for debt repayment and construction of its onshore storage infrastructure, it struck a deal in December 2010 to sell its shipyard in Quanzhou, Fujian province, for HK$1.8 billion.

But the buyer, Grand China Logistics, part of state-owned HNA Group, failed to complete the deal after making a provisional payment of HK$913 million and is seeking a court order in Shanghai to recover the HK$913 million and cancel the deal.

The development resulted in Titan defaulting in March this year on its repayment obligation on its restructured debt.

The default led to a request from Warburg for payment on the bonds it was owed and since the cash-strapped Titan was unable to do so, Warburg obtained a court order in the British Virgin Islands last month to appoint liquidators to wind up StorageCo. It also sought another court order in Bermuda to appoint a provisional liquidator to wind up Titan - and this case will be heard on Thursday.

Titan's default also saw Warburg exercise its right to raise its stake in the joint venture StorageCo to 50.1 per cent from 49.9 per cent in May this year.

People familiar with the situation said Warburg then unilaterally moved in mid-June to take over StorageCo by appointing a new board of directors and taking possession of the company chop needed to authorise all transactions and agreements, much to the anger of Titan's management.

Neither party was willing to comment on these developments.

On July 19, Warburg, through its associate firm Saturn Storage, filed a writ in the Hong Kong High Court, alleging it had been damaged by the actions of Tsoi, Titan, Titan's president Patrick Wong Siu-hung, and chief financial officer Allen Tu Chung-to.

Saturn claimed the parties caused the unauthorised execution and concealment of 1.48 billion yuan (HK$1.81 billion) of debt guarantees from StorageCo.

Meanwhile, rivals were circling for the disputed assets.

On Wednesday last week, Titan said Guangdong Zhenrong Energy, 44.3 per cent-owned by Titan's customer, state-owned oil and commodities trader Zhuhai Zhenrong, offered to buy 90 per cent of Titan. Guangdong Zhenrong last Wednesday also offered to buy StorageCo's four storage farms and related facilities for up to US$145 million.

A day later, Warburg said it had formed a joint venture with Titan rival Guangzhou-based SouthernPec, which aims to submit a restructuring plan and a bid for StorageCo through its liquidators. No bid price and restructuring terms were given.

According to an analysis by FTI Consulting seen by the South China Morning Post, most bondholders are expected to retrieve between 5 per cent and 10 per cent of their investment if all of Titan's assets are sold via the liquidation process, without investment from a white knight. FTI was hired by Titan to provide bondholders estimates of payments they may receive under different restructuring scenarios.

Ten years after he founded Titan in 2002, 49-year-old Tsoi stepped down last month and became a non-executive director. During his tenure at the top, Tsoi, who speaks with a heavy Fujian accent, preferred to let his more internationally exposed lieutenants, such as former chief executives Zheng Dunxun and Barry Cheung Chun-yuen, and president Wong be the frontmen answering questions from journalists, analysts and investors.

"Tsoi is very generous when it comes to hiring the best talent in the industry," a former Titan manager said. "He is also very decisive when it comes to making key decisions. But his problem was that he was overly ambitious on the pace of Titan's expansion and he was too hands-on, which meant the talent of his most senior managers was underutilised."

Zheng was a former chief executive of state-owned oil trading giant Sinochem. Cheung was an ex-chief executive of London-listed mainland energy firm Fortune Oil.

Tsoi could not be reached for comment.

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