Caixin

Guangxi Nonferrous' Creditors Veto Insolvency Plan

By Zhang Yu and Dong Tongjian

(Shanghai) — Creditors of Guangxi Nonferrous Metals Group have vetoed an insolvency plan in a case that shows the obstacles that state-owned enterprises (SOEs) face as they try to complete the bankruptcy process.

In the plan, the firm's bankruptcy administrators proposed auctioning, presumably at a discount, not only the equity stakes the parent has in its seven subsidiaries but also the debts that the subsidiaries owe to the parent, according to several of the firm’s creditors who voted on the bankruptcy plan on Oct. 28.

The debt assets proposed for sale include 937 million yuan ($138.3 million) that Guangxi Nonferrous has in Huiyuan Manganese Industry Co. Ltd., 155 million yuan in Guibei Investment Co. Ltd., and 1.07 million yuan in Yulin Rare Earth Investment Co. Ltd.

According to an evaluation report that Caixin has seen, the assets of Guangxi Nonferrous are estimated at 5.97 billion yuan. So far, creditors have demanded repayment of 14.5 billion yuan in debts, including 10.6 billion yuan in unsecured liabilities. If the assets were to be auctioned on the basis of this evaluation, the liquidation rate of unsecured debts would be only 19.27%.

The administrators proposed the combined sale of equities and debt assets because some of the firm's subsidiaries are also facing difficulties, and the strategy could protect the subsidiaries against bankruptcy. But this would further undermine the benefits of Guangxi Nonferrous' creditors, sources who attended the creditors meeting told Caixin.

The creditors' views of the plan are mixed, however. Some told Caixin that tying up debt assets with equities was no different from a debt-to-equity swap. "It means that the parent group gives up its right to demand repayment of debts from its subsidiaries, and it is unfair," said one creditor. But others hold that such a proposal might broaden its appeal, attracting a greater number of purchasers.

The number of bankruptcy cases in China is on the rise as the government moves to wipe out overcapacity, reorganize distressed companies and restructure the economy. According to data released by the Chinese Supreme People's Court, 1,028 firms successfully filed for bankruptcy in the first quarter of 2016, up 52.5% compared with the same period a year earlier.

But while many SOEs with excess capacity have been kept afloat to bolster the economy, liabilities have been mounting, creating companies that are too big to fail. And legal and institutional obstacles make going bankrupt difficult in China.

"At this stage, it is very hard for creditors to push for more compromises from the bankruptcy administrators, even though they will revise the insolvency plan," said Song Yixin, a lawyer with Shanghai Tianming Law Firm, which focuses on investment and bankruptcy. "Bankruptcy law in China is not aligned with the interests of the creditors, and the fact that the administrators are always appointed by a court raises the suspicion that there is government intervention."

In fact, creditors opposed a debt-to-equity swap plan in April, when the administrators proposed to cancel a 912 million yuan debt in Huiyuan Manganese Industry in exchange for equities on the grounds that it ignored their interests.

Several analysts told Caixin that bankruptcy was an inevitable way to get rid of "zombie enterprises" — heavily indebted companies that have no meaningful operations and are kept afloat through local government protection — but that if insolvent companies seek legal loopholes to dodge creditors, investor confidence will be undermined.

The next step for Guangxi Nonferrous Metals is another round of creditors' meetings, which will be convened after the administrators revise the insolvency plan. And if the revised plan is rejected, the courts will step in to make a decision.

The government-run metals producer in September became the first interbank bond issuer to be declared bankrupt.

Contact reporter Dong Tongjian (tongjiandong@caixin.com); editor Kerry Nelson (kerry@caixin.com)

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