Case 3: China cement default | Launching Asean SME digital trade platform

In 2015 cement turned itself into an « Out-of-favor » industry with the following criteria:
14 out of Top 20 cement players are listed.
- High fragmentation despite 63% capacity concentration among 20 Top players.
- Low capacity utilization (est. 60% on average).
- Decline in volumes and prices since 2014 lead to severe pressure on operating results.
We are considering SC, a major Shanghai listed cement manufacturing company.The shareholders’ structure could have reflected a positive consolidation of the sector but for existing tensions with Chinese management.

In 6 months after the offshore bonds were issued the operating results of the company deteriorated sharply.

A shareholders' dispute started and led to chaotic decision making, legal enforcement, and complex bankruptcy process.

The shareholders’ structure could have reflected a positive consolidation of the sector but for existing tensions with management:
- the“family” who led the development of the group and who appointed the key directors up to April 2015
- Public
- A major Chinese SOE: China National Building Material Company (16.7%), and
- Two large competitors. Tianrui Group became the largest shareholder of Shanshui in April 2015 when it increased its stake to 28%). Tianrui Group is a HK listed cement company backed by two strong sponsors: the private equity firm KKR and Titan Cement, a leading cement international firm. The 2nd corporate shareholder was Asia Cement Corporation (20.9%).
In November 2015 the company defaulted on interest payments due on a Yuan 7 billion onshore bond.
In January 2016 a 2nd default occured on the USD500m offshore bond.
How to preserve value for foreign investors?

17 creditors have filed law suits at various mainland courts alleging non-payment of debt amounting to 2.8 billion yuan, Shandong Shanshui said in a statement on January 12.

Some of Shandong Shanshui’s assets have been frozen under order of various courts. These include various bank accounts, land, properties and shares in frozen subsidiaries. The new Board can not operate the business any more.

The recovery of creditors will be highly difficult due to the following:

The fight between shareholders has been highly disruptive of the operations in a declining market.
Business continuity can not be enforced by one single Court in China.
There is no clear path on “protecting the Group as a whole” unless the State intervenes.
Bond holders are on-shore and off-shore. Cross default clauses may have been triggered by banks on the mainland.
There was no such situation to be compared with in the past.
The holding company is based in the Caymans. The assets are based in China. Liquidation law may not enforceable at all.

An immediate plan of actions led by the Bond holders would have preserved the value of their investment:

Create a representation Committee to open discussions with the new majority shareholders.
Void right away contractual clauses that were disruptive of the business (key man clause, cross default clause...).

Obtain a repayment schedule depending on a new business plan as it was obvious that the June 2015 net debt level was not sustainable (3O x EBITDA).