Sinopec Zhenhai Refinery & Chemical is holding talks with BP on US$128 million worth of convertible bonds.
The bonds, if converted into equity, would give BP at least 20 per cent of China's leading oil refinery, which is also a unit of the mainland's No 2 oil producer, China Petroleum and Chemical Corp (Sinopec). The bonds are part of a US$200 million tranche issued by Zhenhai in December 1996, which carry a coupon rate of 3 per cent with maturity in December 2003.
Atlantic Richfield bought the bonds and had a 9.9 per cent equity holding in Zhenhai before its merger with BP last year. Investors have had the option to convert them into equity since December 1997. However, from December 19 this year, they will be able to sell the bonds to Zhenhai for a premium of 22.94 per cent of the principal, which Zhenhai might be keen to avoid.
BP held the bulk of the US$155 million that remained outstanding, said Zhu Zengqing, Zhenhai's deputy chief accountant.
The outstanding principal plus interest would be US$191 million by the December date, he said, adding Zhenhai would not have difficulty repaying the debt as it had more than US$100 million of foreign-currency reserves on hand and a number of domestic banks had pledged help.
Most analysts agreed that the hefty HK$2.80 per share conversion rate negotiated in 1996 could be deterring the oil giant from converting the bonds.