Asia Aluminum withdraws tender offer

Asia Aluminum has terminated its tender offer, which had been widely criticised and failed to gain support from the holders of the bonds and notes that it was seeking to buy back. The termination was confirmed in a brief statement by the company after Ferrier Hodgson announced that it had been appointed provisional liquidators of the Asia Aluminum group by the High Court in Hong Kong.

The immediate appointment of provisional liquidators was not that surprising since the Chinese aluminium producer had warned investors all along that their acceptance of the tender offer was basically the only way to keep the company out of bankruptcy. In the offer document, the company noted that its bank creditors may demand immediate repayment of all outstanding amounts and refuse to approve further drawdowns under its existing working capital facilities should the tender not go through.

According to last night's announcement, however, it was not the onshore creditors but the Chinese municipal government that pulled the plug by withdrawing its earlier promise to provide financing for the tender offer. Sources say the government had become increasingly uneasy about the deal amid continuous criticism in the media of the offering structure and the government's role. And it appears that when a substantial number of the large bondholders and the holders of the Payment in Kind (PIK) notes did not to accept the tender by the early deadline of March 10, the municipal government decided to withdraw its support.

Investors accepting the offer after the early deadline, but before the close of the tender on May 18, would have received 5 cents less per dollar, which means it is unlikely that the acceptance rate would have changed dramatically between now than then. Asia Aluminum was offering to pay investors who tendered by the early deadline 27.5 cents per dollar for the $450 million of 8% bonds due 2011 and 13.5 cents per dollar for the $727.5 million of outstanding PIK notes with 1.7 million warrants attached.

The appointment of provisional liquidators doesn't necessarily mean that the company will be wound up, however. The liquidators say their primary task is to preserve the assets of the group and added that they will be in a position to "explore other corporate rescue and restructuring plans with the creditors".

"We have only just been appointed and we will immediately commence a review of the company's financial position and its operations. It is too early to comment further. We are assessing the situation and will work closely with all stakeholders to identify all of the options available," says Vincent Fok of Ferrier Hodgson, who was appointed to the case together with Rod Sutton.

As of last night it was unclear what those options may be. In particular there was no information about what powers the provisional liquidators will have with regard to the group's aluminium operations, which are all based in China, while they have been appointed liquidators of three offshore companies -- Asia Aluminum Holdings, group holding company AA Investments, and China Steel Development, which is a wholly-owned subsidiary of AAH.

In the release, Ferrier Hodgson says the purpose of its appointment is to preserve the assets and operations of the company "for all stakeholders, both within and outside the Peoples Republic of China" and added that it will do its financial assessment in consultation with the local management, creditors and other stakeholders in order to determine the optimal strategy for the business.

It may be of some comfort to the investors that Ferrier Hodgson describes itself not as a liquidator, but as "Asia's leading independent corporate restructuring and turnaround firm".

Some of the bond and PIK note holders have argued that a liquidation is unnecessary and if the company could only get enough cash to tide it over until its new flat-rolled product plant begins production in June, it should be able to work itself out of the current situation as the new product plant is expected to substantially improve the company's cashflow.

"The company clearly has short-term financing pressures after burning through a lot of cash over the past few months for a variety of reasons, but with a little bit more cash in a few months' time it is going to have an extremely valuable asset," one source said last night.

It is not immediately clear where that cash would come from though. Asia Aluminum's founding chairman, Kwong Wui-chun, had received letters of intent from two of the company's existing Chinese bank creditors, saying they were prepared to provide up to Rmb6 billion ($879 million) of additional funding to allow the company to refinance its outstanding debt and cover its working capital needs. However, these funds would only become available if the tender was successfully completed.

In the tender offer document, the company said it had seen a significant decline in its cash balances in the second half of 2008 and by the end of the year had only HK$702.8 million ($90 million) of consolidated cash and bank balances due to a sharp decline in sales volumes, an increasing need for working capital to finance its flat-rolled product expansion project, as well as the tighter credit markets.

Asia Aluminum is no small newcomer to the business though -- it is China's largest aluminium extruder with an annual extrusion capacity of 310,000 metric tonnes and ranks among the top three aluminium processing companies in the world. It sells its products primarily to domestic and overseas customers in the construction, infrastructure, industrial, home building and improvement and transportation sectors.

Part of the discontent among the bond and PIK note holders was to do with the fact that they had to accept such a large haircut and would be forced out of the company just a few months before the costly multi-year expansion project is due to start yielding revenues. Several market participants have noted that on similar restructurings in the US, PIK note holders have typically not been asked to take a haircut without getting at least some equity in return.

There was also a sense that the foreign creditors were ending up with short straw, while the domestic banks would have to make no reduction on their claims and the local government would end up with 25% of the equity at no cost (in return for providing a new loan). What they wanted to see instead, was a solution to Asia Aluminum's current cash problems that would allow the foreign creditors a chance to remain part of the company post a restructuring.

Whether or not such a solution is more likely after the appointment of provisional liquidators, remains to be seen. But irrespective of whether the bond and note holders believe that this step is necessary or not, it is likely to be regarded as a positive in the sense that it should result in a more transparent process. Many of the holders have been upset about the lack of transparency related to the tender, including the absence of audited financial information for the second half of 2008, and this added to their scepticism towards the company's claim that the tender was really the last alternative to save the company. 

By deciding not to accept the tender, they have indirectly also shown that they don't believe the liquidation analysis provided by Evolution Watterson Securities a couple of weeks ago after it was appointed as an independent financial adviser to Asia Aluminum. Evolution's conclusion was that the recovery rate for the bondholders if the company went through an ongoing liquidation, in other words that it continues to operate as normal under the management of provisional liquidators while it looks for suitable buyers, would be 16.91 Hong Kong cents to the Hong Kong dollar (2.2 US cents), while the PIK note holders would get no more than 0.9 Hong Kong cent.