China Shanshui Cement to buy back bonds with support from Tianrui

China Shanshui Cement Group moves to avert another potential default on its debt obligations

PUBLISHED : Thursday, 14 January, 2016, 7:20pm
UPDATED : Thursday, 14 January, 2016, 7:20pm

China Shanshui Cement Group, whose old and new board of directors have been embroiled in an eight-month battle over management control, has offered to buy back US$525.9 million worth of bonds, averting another potential default on its debt obligations.

Rival Tianrui Group, which launched a hostile takeover by snapping up its shares in the open market last April and raised its stake to 28.2 per cent to become Shanshui’s largest shareholder, will provide the necessary funding to Shanshui to complete the buy-back.

Henan province-based Tianrui had already amassed a 10.5 per cent stake in Shandong Province-based Shanshui, China’s seventh largest cement maker, in February, by paying a hefty premium compared to the prevailing market price.

“The Board has received assurances from Tianrui that it will procure that the company has sufficient

funds to comply with its financial and other obligations in relation to the offer at the relevant time,” Shanshui said in a filing to the Hong Kong stock exchange.

A spokesman for Tianrui declined to disclose who is providing financial backing, but said it is sure of being able to meet the needs of loss-making Shanshui’s bonds repurchase.

Shanshui has already defaulted on a 2 billion yuan (HK$2.4 billion) bond repayment in November, and its principal Shandong unit - which is still under the control of former chairman and founder Zhang Caikui who retains the company chops - warned late last month it will likely default on another 1.8 billion yuan bond this month.

According to a bond prospectus issued by Tianrui two months ago, the parent of Hong Kong-listed China Tianrui Group Cement had a debt-to-asset ratio of 65 per cent at the end of March last year.

It had 590 million yuan of cash and 3.75 billion yuan of borrowings at the end of 2014, and a net debt-to-shareholders’ equity ratio of 40.9 per cent.

The Shanshui bond repurchase, triggered by a change in shareholding control and board reshuffle last month, was offered to holders of the US$500 million senior notes that carry 7.5 per cent of annual interest and will mature in 2020, as well as US$28.9 million of 8.5 per cent notes due this year.

The bondholders are allowed to demand Shanshui to buy back the bonds at a 1 per cent premium to their principal amounts in case the original controlling shareholders Zhang Caikui and his son Zhang Bin lost management control, under the bond issuance terms.

The elder Zhang was removed from the board in October in an extraordinary shareholders’ meeting called by Tianrui.

His son was ousted early last month as the entire board, including directors appointed by Taiwan-listed Asia Cement and state-backed Hong Kong-listed China National Building Material (CNBM) were removed.

China Shanshui Investment, in which Zhang Caikui is a trustee holding shares on behalf of nearly 2,500 Shanshui’s employees as a result of a state asset privatisation over a decade ago, owns 25.1 per cent of Shanshui.

CNBM has a stake of around 16.7 per cent in Shanshui, compared to Asia Cement’s 20.9 per cent.