China Aviation back from grave

After running on empty for a year, financially troubled China Aviation Oil (Singapore) Corp (CAO) is now, so to speak, pumped up. The Singapore-listed arm of China Aviation Oil Holding Co (CAOHC), which in November last year collapsed from derivatives trading losses of US$550 million, has agreed a bailout deal with its Beijing-based parent firm and strategic investors - oil giant BP and Singapore investment company Temasek Holdings - to pump in new funds totalling US$130 million. As part of the slow and painful restructuring process that the scandal-hit CAO has been working on over the past year, the new investment announced last week is a timely shot in the arm and looks like a win-win deal for all the parties involved. In rescuing its strategic offshore unit, CAOHC and ultimately the powers that be at the state-owned Assets Supervision and Administration Commission have revealed their hand. 'The political will to resurrect the company was very strong,' David Gerald, president of the Securities Investors Association (Singapore), told the South China Morning Post. The holding company, a state-owned enterprise that is a leader in its field, was not about to wash its hands of the problems of a subsidiary that was a dominant player in jet fuel supply to mainland airports and let it go under. CAO, which filed for court protection in November last year, had a net shareholders' deficit of S$663 million ($3.06 billion), and 'there is material uncertainty which may cast significant doubt about the ability' of CAO and its subsidiaries 'to continue as going concerns', said Ernst & Young in its auditors' report. Gu Yanfei, who heads a special task force charged with restructuring CAO, said it all in thanking the parent company for its 'unwavering support of CAO'. In forking out US$75.77 million, CAOHC will retain a reduced majority 51 per cent stake in CAO after its restructuring, down from 60.5 per cent. This is a nice balance with the addition of the strategic investors. Temasek will inject US$10.23 million through its subsidiary, Aranda Investments. Some regard this as a token investment but Temasek would concede only that it was pleased to join BP as strategic investors in this investment. 'We are happy with our shareholding of 4.65 per cent,' said Temasek spokeswoman Eva Ho. Of greater significance is BP's involvement, both for itself and for CAO. BP is investing US$44 million, through subsidiary BP Investments Asia, for a 20 per cent stake. This may not be massive for a global oil firm but it is a great commercial opportunity for a group that is seeking to expand in China and get a foot in the door as the Chinese government opens up the jet fuel market according to World Trade Organisation requirements. With deregulation comes foreign players, although how much of a slice of the mainland fuel market they can corner is unclear, but BP now has a leg up. The fact that CAO picked BP in the face of keen interest from rivals including European oil trader Vitol is a dividend of sorts in the first place. BP and Temasek were selected as strategic investors based on 'several factors, including the reputation and strength of the investors as well as the potential future co-operation and contributions of the investors to future growth', CAO said in a statement. Taking on board a solid group such as BP will also work to CAO's advantage. After its trading debacle the market has been asking questions of the company with regards to risk management and corporate governance. This is where the two strategic investors come in, their investments aside. The British firm will be in a position to contribute 'with corporate governance and supply and trading management systems', said Mike Bennetts, BP's regional director for supply and trading. BP will second two managers to head CAO's risk management and trading divisions and also nominate two directors to the company's board. The participation of the two international firms showed faith in CAO and its viability, Mr Gerald said. But what is in the investment agreement for CAO's creditors? Quite a lot if viewed from a half-full glass perspective as US$100 million of the fund injection, plus US$30 million derived from the firm's assets, will go towards paying the creditors, including Mitsui & Co, Barclays Capital and South Korea's SK Energy and BP. The creditors also have the option of buying 10 per cent of CAO for US$22 million. CAO's 16,000 minority shareholders, meanwhile, will hold the remaining 14.35 per cent of the company. The firm's shares will be valued at 51.5 Singapore cents after consolidation of five shares into one. They last traded at 96.5 cents a year ago but the scrip hitherto represented huge paper losses for the holders of a stock that was a market darling following its listing in 2001. 'But now there is something in hand and shareholders can look forward to realising some value,' said Mr Gerald, whose organisation represents small investors in the CAO affair. 'We are very pleased that the company is being resurrected; it was almost in the grave.' The investment agreement will have to be approved by regulatory bodies and the shareholders. For CAO, it has been a year clouded by scandal and uncertainty with former chief executive Chen Jiulin and former finance chief Peter Lim scheduled to face trial in March next year. But with the firm pumped up, shareholders and the markets may well be cheering, 'jia you' (literally, add oil). Meaning, way to go!