Caixin
Nov 16, 2020 08:15 PM
FINANCE

BMW’s China Venture Partner May Be Forced to Restructure

Brilliance Auto has transferred some of its valuable assets in recent months.
Brilliance Auto has transferred some of its valuable assets in recent months.

Brilliance Auto Group Holdings Co. Ltd., parent of BMW AG’s main Chinese joint-venture partner, is facing a potential restructuring requested by one of its creditors, as the carmaker sinks deeper into a liquidity crisis following a 1 billion yuan ($149 million) bond default in October.

GZ Tooling Group Automobile Technology Co. Ltd. filed a restructuring request under China’s bankruptcy law to a court in the northeastern city of Shenyang on Friday, saying that Brilliance Auto had defaulted on debts it owed GZ Tooling, and the company’s assets were not sufficient to repay them, according to a stock exchange filing (link in Chinese) by one of Brilliance Auto’s Shanghai-listed subsidiaries.

In general, a court has 15 days to decide if it will accept such a case, according to the bankruptcy law. It’s unclear how much money Brilliance Auto owes GZ Tooling.

The restructuring request came just three weeks after Brilliance Auto failed to repay 1 billion yuan in principal and 53 million yuan in interest on a bond due Oct. 23.

Brilliance Auto’s 2020 interim report (link in Chinese) showed that it had about 132.8 billion yuan in total liabilities at the end of June, and its interest-bearing debt amounted to more than 60 billion yuan.

Brilliance Auto is perhaps best known for its collaboration with BMW. In 2003, Hong Kong-listed Brilliance China Automotive Holdings Ltd., a Brilliance Auto subsidiary, established a joint venture with the German luxury automaker to make passenger cars with the BMW brand in Shenyang, capital of Brilliance Auto’s home province.

That venture, BMW Brilliance Automotive Ltd., has been a success. It has held about a quarter of China’s luxury passenger car market over the last three years, and contributed over 90% of Brilliance Auto’s revenue and net profits last year, according to the companies’ financial data. But in October 2018, the partners agreed BMW would increase its stake in the venture from 50% to 75% in 2022, when China’s current foreign ownership limits for the auto industry expire.

Despite the joint venture’s success, Brilliance Auto has struggled with liquidity issues in recent months, and rumors have emerged that it may be shifting valuable assets to dodge its debt. A letter widely circulated online which was purportedly sent by China Development Bank Securities Co. Ltd. (CDB Securities) to the central bank’s financial stability bureau suggested that Brilliance Auto had transferred its core assets and pledged them for loans while simultaneously facilitating bankruptcy restructuring in an effort to dodge its debts. “It’s obvious that the company is trying to dodge debt by taking advantage of the bankruptcy mechanism,” the letter said.

CDB Securities is both the primary underwriter for 9.1 billion yuan of Brilliance Auto’s outstanding bonds, and a major holder of them. Brilliance Auto has some 17.2 billion yuan of outstanding bonds in total, according to data provider Wind Information Co. Ltd.

The authenticity of the letter remains unclear. One source with knowledge of the matter told Caixin that the letter had not been sent to the central bank as it had not obtained approval from CDB Securities’ parent. A CDB Securities representative didn’t respond to questions about the authenticity of the letter.

Brilliance Auto has transferred some of its valuable assets in recent months. In June, Brilliance Auto transferred (link in Chinese) the majority of the shares it held in Shanghai-listed Shanghai Shenhua Holdings Co. Ltd. to a wholly owned subsidiary, and in September entered an agreement to do the same with all of its holdings of Brilliance China Automotive, transferring them to another wholly owned subsidiary, Liaoning Xinrui Automotive Industry Development Co. Ltd. On Nov. 5, Liaoning Xinrui signed an agreement with a lender to pledge all the shares as collateral for loans.

That reshuffling has raised eyebrows among Brilliance Auto’s creditors, some of whom asked the company in a Nov. 9 meeting about how much financing Liaoning Xinrui took out and how it would use the money, but the company refused to divulge specifics and said only that it was for internal use.

Golden Credit Rating International Co. Ltd. on Nov. 5 downgraded (link in Chinese) Brilliance Auto’s issuer credit rating to CCC from BBB, while Dagong Global Credit Rating Co. Ltd. downgraded (link in Chinese) its rating to BB from A+ on Oct. 28.

Contact reporter Timmy Shen (hongmingshen@caixin.com) and editor Gavin Cross (gavincross@caixin.com)

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