State-Owned Creditor Seeks to Reorganize State-Owned Mining Company

(Beijing) — A state-owned mining company in Jilin province may be forced into bankruptcy by one of its state-owned creditors, an unusual move that has caught other creditors by surprise and raised concerns about whether their interests will be protected.

Jilin Jien Nickel Industry Co. Ltd. — a state-owned, publicly traded mining company listed in Shanghai — received a notice from Jilin City State-Owned Capital Investment Co., one of its creditors, saying it had filed an application to reorganize the nickel company because it was unable to repay 200 million yuan ($29 million) in overdue debts, according to a stock market filing last week.

Both Jien Nickel and Jilin City State-Owned Capital Investment are controlled by Jilin city’s State-Owned Asset Supervision and Administration Commission, a government entity that regulates the local state-owned enterprises (SOEs).

Bankruptcies are becoming more common in China as Beijing looks to eliminate so-called zombie companies, especially in the mining sector, which suffers from overcapacity. But one SOE pushing another that has the same actual controller toward bankruptcy is unusual.

One institutional creditor told Caixin that most of Jien Nickel’s creditors had not known about the reorganization application before the company disclosed it. The creditor said they had hoped the local state-owned assets supervisory authority would step in to bail out the failing company.

“The prospect is completely unclear in terms of how the interests of creditors can be protected when reorganization is being pressed without a good communication and a concrete reorganization proposal,” the institutional creditor said.

Under Chinese bankruptcy law, debtors or administrators appointed by a court need to submit a debt reorganization plan to both the court and creditors within six months if the court rules to allow the insolvent company to enter the debt-restructuring process. So far, the Jilin court has yet to make that decision, according to a company statement last week.

Jien Nickel said in a January preliminary income statement that the company was expected to report a net loss of 2.2 billion yuan in 2016 due to the sluggish economy, the company’s tightened cash flow and mounting overdue loans. A year earlier, Jien Nickel lost 2.9 billion yuan, the report said.

As of Dec. 21, Jien Nickel had built up debts owed to financial institutions of more than 6.6 billion yuan in principal and interest payments, according to a company statement. Creditor sources told Caixin that Jien Nickel currently has more than 11 billion yuan in total debts.

“China aims to adopt more market-driven measures to effectively dispose of ‘zombie enterprises’, and push ahead with merger, reorganization, bankruptcy and liquidation,” as “China is determined to eliminate excess capacity,” according to the government work report delivered by Premier Li Keqiang on Sunday.

But China still lacks experience with market-oriented bankruptcies, particularly when it comes to SOEs that often have little incentive to generate profits.

“The essence of a successful reorganization is to draft a plan that takes cares of the interests of all parties, including the government, creditors and the company,” a creditor of Jien Nickel said. “Otherwise, the interests of creditors are likely to be undermined.”

Contact reporter Dong Tongjian (tongjiandong@caixin.com)