Asia’s top banks face losses as China Huishan Dairy proposes provisional liquidation

Embattled China Huishan Dairy Holdings has instructed lawyers to prepare for its provisional liquidation after finding more debt, leaving some of the top lenders in Asia vulnerable.

According to a filing to the Hong Kong stock exchange on Thursday, the net liabilities of the Liaoning-based firm’s China entities “could have been” 10.5 billion yuan (US$1.58 billion) as of March.

“The board has instructed the Cayman legal advisers of the company to prepare the relevant documentation to place the company into provisional liquidation,” said Huishan Dairy in the filing. “Such steps will take into account, as far as possible, options available to the company to preserve the assets of the group.”

A provisional liquidation filed by a company is usually to shield its assets from creditor claims while it tries to implement a restructuring. Huishan said in early November that a debt restructuring proposal had been passed by a majority of its onshore creditors.

How the debt bubble burst for China’s Huishan Dairy

Shen Meng, executive director with investment bank Chanson & Co, said that the more urgent issue here should be for those offshore creditors, who were in a weaker position compared to their mainland peers, to voice their requirements before the liquidation process begins, as the current environment was more beneficial for onshore creditors.

“Once a decision has been made through mainland creditors and shareholders, it will be much more difficult for those offshore lenders to defend their rights,” said Shen.

Concerns about Huishan were first raised by short seller Muddy Waters in a report published in December, in which it said that the company was worth “close to zero”. Three months later, on March 24, Huishan’s shares plunged 85 per cent in 90 minutes, following which the company’s shares were suspended from trading.

Since then, Huishan Dairy has been trying to restructure its debt, which has proved difficult.

China’s Huishan Dairy rolls out debt restructuring plan amid cash crunch

The company said in a June filing that its total debt stood at 26.73 billion yuan, including loans from banks of about 18.7 billion yuan.

The banks with exposure to Huishan Dairy include ICBC, Bank of China, Bank of Communications and HSBC. HSBC, which took part in a US$200 million syndicated loan, in September was the first to declare that Huishan had defaulted.

Bank of China has extended about US$490 million in loans to the company, making it Huishan’s biggest creditor, followed by a much lesser known local lender, Jilin Jiutai Rural Commercial Bank, which has given US$270 million in loans.

HSBC said it would not comment on this issue, while calls to the Bank of China’s communications department went unanswered.

As the debt owed by Huishan has already exceeded its whole assets, the key problem here is whether some of the personal assets of Yang Kai, the chairman, could be used to repay the debt, Chanson’s Shen said.

The case should serve as a renewed reminder for foreign and Hong Kong banks, as they are increasingly exposed to mainland companies, according to analysts.

“This is indeed an area that we are following closely in order to assess whether there is a pattern that points towards weaknesses in banks’ underwriting standards,” said Sabine Bauer, senior director for financial institutions at Fitch Ratings in Hong Kong.