Asia Aluminum Holdings Ltd. bondholders formed a group to oppose a buyback proposal that may test the rights of foreign investors in Chinese high-yield bonds.
Asia Aluminum on February 13 offered to pay 27.5 cents on the dollar for its 8 per cent dollar notes due 2011 while parent AA Investments Co. offered 13.5 cents for so-called pay-in-kind notes. Chairman Kwong Wui Chun wrote to investors urging them to accept the plan, saying the company risks bankruptcy if it isn’t restructured.
“The group believes the company’s offer is low. We would encourage other holders to reject the offer and join the group to negotiate a fairer outcome,” David North, head of asset allocation at Legal & General Investment Management Ltd., said in a phone interview from London. “It’s a litmus test for negotiations for offshore investors into Chinese debt markets.”
Asia’s high-yield corporate bond markets have dried up since 2007 as the credit crisis triggered by US subprime mortgage defaults curbed appetite for all but the safest debt. The cost of borrowing dollars is rising as the global recession deepens and investors worry about counterparty default risk, the benchmark London interbank offered rate shows.
High-yield, or junk, debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s. Asia Aluminum was founded by Kwong in 1992 and makes aluminum in China for construction, machinery, drinks cans and vehicles, according to its website. Kwong on February 27 offered to give his 97 per cent holding in AA Investments to bondholders if they agreed to the ‘crucial’ restructuring proposal that would enable the company to secure Chinese bank loans.
“Poor Chinese offshore bond documentation will continue to result in a deterioration of bondholders’ relative position versus other lenders,” Fitch Ratings said in a March 4 report. Weak governance standards at privately-held Chinese companies often mean decisions are taken “primarily for the benefit of the majority shareholder,” it said.
Officials at Asia Aluminum or representatives Financial Dynamics was immediately available for comment today. The company said in a March 4 filing to the Singapore Stock Exchange that it may scrap the buyback tender if not enough offers are received by the “early consent date” of 5 pm in New York March 10. The bondholder “group represents the majority of the notes,” Legal & General’s North said today, declining to name other members.
Sales of Asia Aluminum’s assets in a bankruptcy would yield investors a maximum 16.9 cents on the dollar and a minimum of about 4 cents, according to a report by Evolution Watterson Securities distributed by Asia Aluminum March 3.
“A broader issue for the market is the potential damage that such buyback transactions could do to investor appetite,” Fitch said in its report. “The future healthy development of the Asian — and specifically the Chinese — high-yield market is dependent on investors becoming comfortable with the risks they are asked to take.”
