Friday, January 11, 2013

China Animal Healthcare A Spent Force?

China Animal Healthcare announced on December 21, 2012 that talks of its delisting from the Singapore Stock Exchange were in advance stages. Shortly after, on January 9, 2013, Blackstone Capital announced that it was redeeming the bonds issued by China Animal Healthcare. This would have to be settled within 6 months from notice.

Did Blackstone made a gain from its investment of about 3 years? Here are some concrete numbers:

Subscribed to CAH bonds: USD 40 mil
Placement of 20 million shares at 0.35/share: SGD 7 mil
Redeemed CAH bonds: USD 54.4 mil

From the above, assuming no hair cut, a successful redemption and that Blackstone has sold all its placement shares at SGD 0.25, it probably made about USD 12-13 mil.

Interestingly, China Animal Healthcare has assured that the company has sufficient internal resources to settle the redemption. This is because there have been instances of S-Chips not being able to make payment, China Milk Products being an example.

Also, the bond agreement has been amended such that the CEO and his wife need no longer hold 45% share in the company, but 30% from time to time. failing which would trigger an event of default. Originally, I think the purpose of having the two of them hold 45% of the shares was to ensure that they ran the company in the shareholders' interest. Therefore, allowing the couple to pare their stakes by one-third seems to say something but not sure what.

If you look at China Animal Healthcare's 3Q2012 results, you will see the following:

Cash and cash equivalents: RMB 697,902,000 ~USD 112 mil
Total liabilities: RMB 585,508,000 ~ USD 95 mil

I am using total liabilities as a gauge because under convertible bonds, an item under non-current liabilities, the amount is much lesser than the USD 40 mil RMB equivalent par value. of  RMB 340 mil. I then realised that if you add "derivative financial instruments" with "convertible bonds" do you get the par value of bonds. That said, China Animal Healthcare based on these numbers should be able to make bond payment by paying Blackstone first, and other debtors later.

Now, returning to the amendment in the shareholding requirement, there are 1,591 million shares issued and 15% of this number at SGD 0.25 and at current exchange rates is USD 48.7 mil.

Bearing in mind that I am writing all this around 6-7 am Singapore and I might be hallucinating, all the numbers seem to suggest that the bond repayment may be met by a share sell by the major shareholders plus a little bit more (USD 54.4 mil vs USD 48.7 mil).

I say hallucinating because share sales by substantial shareholders have to be announced on the exchange. Moreover, even if the CEO and his wife pare their stakes, why and how could it be used to pay off the debt since the proceeds are not part of China Animal Healthcare's? More strange, I wrote about this scenario some time back and just lost 2 hours of sleep re-writing the worst-case scenario!

Your comments are welcome.

Disclosure: End-December 2012, I sold off my 4,000 shares of China Animal Healthcare and have no stake in the company.

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