Investors in China haunted by "key man" clause

China Tianrui Cement Co

13/11/2015 04:47

(The author is a Reuters Breakingviews columnist. The opinions 
expressed are his own.) 
    By Peter Thal Larsen 
    HONG KONG, Nov 13 (Reuters Breakingviews) - What once seemed 
like prudent risk management is coming back to haunt investors 
in China. Lenders to companies in the People's Republic 
sometimes insert a provision that allows them to demand 
repayment if a top executive leaves. Yet such "key man" clauses 
may be contributing to additional financial distress. 
    For an example of what can go wrong, consider China Shanshui 
Cement  0691.HK . The Hong Kong-listed group is facing 
liquidation after a shareholder spat led it to default on a 2 
billion yuan ($314 million) onshore loan. Though China's cement 
industry is in poor shape, the immediate trigger for Shanshui's 
distress is an ongoing tussle for control between chairman Zhang 
Bin and local cement rival China Tianrui  1252.HK . 
    Tianrui's purchase of a 28 percent stake earlier this year 
made it Shanshui's biggest shareholder. This activated a clause 
that required Shanshui to buy back $380 million of junk bonds. 
Since then, Tianrui has called three extraordinary general 
meetings in an effort to eject Zhang and other directors. 
Success would have triggered the repayment of offshore bonds 
worth $500 million. Though the bonds are not due for repayment 
until 2020, they contain a clause that forces Shanshui to buy 
them back within 30 days if Zhang is no longer the chairman. 
    Though Zhang has managed to cling on, uncertainty about his 
position - and the effect that his departure would have on 
Shanshui's finances - has made other creditors wary, leading to 
the latest default. 
    It's not the first time that a "key man" clause has 
side-swiped investors in China. Last December, Chinese property 
developer Kaisa  1638.HK  failed to repay a HK$400 million ($52 
million) bank loan that came due after its chairman resigned. 
Even though the chairman subsequently returned, offshore 
creditors are still facing a haircut on their bonds. 
    The success of Chinese companies often depends on personal 
relationships. So it makes sense for lenders to view the 
continued presence of a senior executive as vital to getting 
their money back. Yet recent experience suggests that such "key 
man" clauses can create unnecessary financial instability. They 
are probably best avoided. 
     
    On Twitter https://twitter.com/peter_tl. 
  
 
     
     
    CONTEXT NEWS 
    - Cash-strapped China Shanshui Cement has received several 
demands for repayments from creditors following a default, the 
company said on Nov. 12. 
    - The previous day, the company warned investors it will 
default on an onshore loan worth 2 billion yuan ($314 million). 
The default triggered an accelerated repayment clause on 
offshore bonds with a face value of $500 million which are due 
in 2020.  
    - Shanshui has filed a winding up petition and an 
application for the appointment of provisional liquidators with 
the Grand Court of the Cayman Islands where it is incorporated.  
    - On Nov. 5, Shanshui warned that it had struggled to secure 
financing due to uncertainty about management, and the impact it 
would have on the company. 
    - Shanshui chairman Zhang Bin has been locked in a spat with 
a shareholder called China Tianrui, which has called three 
extraordinary general meetings since June in an attempt to 
remove him and other directors. 
    - Shanshui's $500 million bonds include a provision that 
they must be repaid within 30 days if Zhang ceases to be the 
company's chairman. 
    - Shanshui statement: http://bit.ly/1QzkKcP 
    - Reuters: China Shanshui says creditors demand repayment 
 urn:newsml:reuters.com:*:nL3N1373RS 
 
     
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 (Editing by Una Galani and Katrina Hamlin) 
 ((peter.thal.larsen@thomsonreuters.com; Reuters Messaging: 
peter.thal.larsen.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA SHANSHUI DEFAULT/BREAKINGVIEWS