Hong Kong regulator queries banks over US$200m Huishan Dairy loan: sources

[HONG KONG] Hong Kong's banking watchdog is questioning lenders over a US$200 million loan raised by China Huishan Dairy Holdings Co Ltd, sources involved in the matter told Reuters, as regulators try to unpick the group's tangled finances.

The Hong Kong Monetary Authority (HKMA) has been increasing its scrutiny of Hong Kong bank lending to mainland Chinese companies, fretting that the city's lenders are growing increasingly exposed to worsening credit conditions there.

Huishan, one of China's biggest dairy companies, embraced 'innovative financing' and investors flocked to a US$1.3 billion Hong Kong listing. But it has now missed debt payments, breached loan covenants, all but two directors have quit its board and a key executive is missing.

Two individuals working on the corporate lending team at one of the banks involved told Reuters that the HKMA had asked banks for information on the due diligence and credit-checking processes undertaken when making the loan in 2015.

A third source at the loans team of a second bank involved said the HKMA had requested information regarding the Huishan loan - taken out with Bank of Shanghai Hong Kong Ltd, China CITIC Bank International Ltd, China Merchants Bank Co Ltd, Chong Hing Bank Ltd, Hang Seng Bank Ltd and HSBC.

He did not elaborate.

Regulators frequently request information from licensed institutions as part of their supervisory work and such inquiries do not indicate wrongdoing. Reuters was not able to ascertain if the HKMA had launched a formal investigation.

However, if the banking regulator finds compliance lapses in relation to the loan the banks could be at risk of a formal sanction such as a fine, one of the sources said.

"As part of the HKMA's day-to-day supervision of banks, we maintain regular dialogues with the industry on different supervisory issues. We do not comment on details of any such dialogues," a spokeswoman for the HKMA said in an email.

Bank of Shanghai Hong Kong, China Merchants Bank and Chong Hing Bank did not respond to requests for comment. China CITIC Bank International, Hang Seng Bank and HSBC declined to comment.

A spokesman for Huishan Dairy declined to comment.

From June to December 2016 Hong Kong banks' mainland related loans rose 3.5 per cent to HK$3.6 trillion (S$646.3 billion), or 16 per cent of total assets, according to HKMA data.

Huishan made headlines last year when it sold and leased back part of its herd. But risks linked to its debt-fuelled growth took center stage after a report from US-based short-seller Muddy Waters questioned its accounting and debt burden.

Huishan last month met creditors and local authorities in a bid to avert lenders calling in loans or filing suits. The local China Banking Regulatory Commission (CBRC) bureau, China's regulator, was also involved in the discussions, according to one individual familiar with the matter.

The CBRC did not immediately respond to a request for comment.

The principal of the US$200 million loan is outstanding in two tranches, US$180 million and HK$156 million.

Under the loan agreement, Huishan Chairman Yang Kai and missing executive Ge Kun must remain in their posts, and together must own at least 30 per cent of Huishan's issued share capital.

Huishan's controlling shareholder Champ Harvest Ltd owns over 70 per cent of its stock, and is majority held by Mr Yang. Champ Harvest has pledged nearly all of the shares it owns as collateral to secure loans.

Shares are currently suspended.

REUTERS