Huishan troubles worsen as banks say violated loan agreement, assets frozen

[SHANGHAI] China Huishan Dairy Holdings Co Ltd is facing a major challenge from creditors after banks including HSBC Holdings PLC said the troubled firm had violated covenants linked to a US$200 million loan, while a Shanghai court froze some assets.

The dairy said in a stock exchange filing late on Monday it had received a letter from HSBC and others alleging "non-compliance with certain of the covenants" of a loan agreement made in 2015, giving the lenders scope to demand repayment. It said it was seeking legal advice over the matter.

The firm also said a court in Shanghai had ruled to have 546 million yuan (S$111 million) worth of assets frozen after an application from creditor Gopher Asset Management Co Ltd. Gopher also applied in Hong Kong but was rejected late last month.

Huishan grabbed headlines last year when it sold and leased back part of its herd to raise funds in what one executive termed "innovative financing". But the risks linked to its rapid debt-fuelled growth drew a harsher spotlight after a December report from US-based short-seller Muddy Waters questioned its accounting and debt burden.

The latest development comes weeks after local authorities asked creditors to refrain from calling in loans or filing suits at a meeting last month. Soon after, trading of Huishan's shares was suspended when the stock plunged 85 per cent in a single day.

Since the share drop, Huishan has said it missed some loan repayments and filed a missing person report in Hong Kong after losing contact with an executive in charge of finances and cash.

The letter from lenders does not mean Huishan defaulted on payments or that creditors are necessarily seeking repayment. However, notifying the borrower of a violation of covenants is often a first warning.

Huishan made the loan with HSBC, China CITIC Bank International Ltd, Hang Seng Bank Ltd, Bank of Shanghai Hong Kong Ltd, China Merchants Bank Co Ltd and Chong Hing Bank Ltd.

The dairy, which took out the three-year loan on Oct 26, 2015, said that the principal was outstanding in two tranches, US$180 million and HK$156 million (US$20.07 million).

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

In a 2015 filing, Huishan said if the covenant was breached, lenders may "cancel the facility granted to the Company under the Facility Agreement or any part thereof" and may "require immediate repayment of the Loan together with all other sums due under the Facility Agreement." HSBC declined to comment.

REUTERS