China Huishan Dairy Holdings Co Ltd said on Tuesday it had fallen behind with some loan repayments, was unable to contact a key finance executive and expressed concern about the strength of creditor support after its stock price plummeted. But the country’s largest integrated dairy firm, which has been on the backfoot since a December attack by U.S.-based short-seller Muddy Waters, denied media reports on Friday that funds had been misappropriated. Its shares fell 85 percent the same day, wiping $4 billion off its market value. Underscoring the depth of its unfolding crisis, Huishan’s filings also showed that most of the shares owned by its controlling shareholder had been pledged as collateral and that the board was seeking clarity on its financial situation.
After finding it had been “late in some bank payments”, Huishan’s Chairman Yang Kai asked the regional Liaoning government for support and met with 23 creditor banks last week to ask for loans to be rolled over.
While creditors had shown support then, the sudden share drop had raised concerns they may no longer be willing to roll over loans and that banks holding its shares as collateral had sold or could sell the stock because of the price decline.
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“Given the significant decrease in share price of the Company and the recent media reports, there is no assurance that such banks’ (supportive) views would remain unchanged,” it said. Huishan’s controlling shareholder, a firm called Champ Harvest which owns 70.8 percent of its stock and is majority held by Yang, has pledged nearly all of the shares to secure loans. These include a HK$2.14 billion ($275 million) loan with Ping An Bank last year backed by 3.4 billion Huishan Dairy shares while a further 6 billion shares were used to secure loans and margin financing for Champ Harvest and other firms controlled by Yang.
“Anybody holding those shares as collateral will be concerned given the drop in share price because it has a direct impact on the loan recoverability if the underlying business is not sound,” said Ted Osborn, a Hong Kong-based partner at PwC who specialises in debt recovery.
Huishan said the Liaoning government had proposed an action plan to solve any overdue interest payments within two weeks and to help bolster the group’s liquidity within a month amid an increasingly challenging environment.
The company also said it had not been able to reach one of its executive directors in charge of the firm’s finances and cash since March 21, when she indicated work stress and said she would take a leave of absence.
The executive had overseen the group’s treasury and cash operations and had managed its relationships with the company’s main bankers.
The firm refuted media reports that Bank of China had conducted an audit of the firm and found a large number of forged invoices and that the firm’s controlling shareholder had misappropriated up to 3 billion yuan.
“The Company categorically denies having approved the issue of any forged invoices and does not believe there to be any misappropriation,” it said in the statement. It added Bank of China had assured the firm no such audit had been carried out.
A Shanghai-based spokesman for Bank of China said he was unable to immediately comment on the matter.
In December, short-seller Muddy Waters questioned Huishan’s profits and said it had inflated spending on its cattle farms to artificially raise capital expenditure figures – an attack that also led to a trading suspension. Analysts said Huishan’s financial woes were spooking investors, who have seen big potential returns in China’s massive demand for dairy.
“The latest financial issues surrounding Huishan, and along with the quality issue in the sector, are driving investors away from those smaller operators in the dairy products segment,” said Steven Leung, sales director at UOB Kay Hian in Hong Kong.
Huishan’s shares, halted since March 24, will continue to be suspended until the board can get more clarity on the firm’s financial position.