Bondholders suffer from China Fishery's bankruptcy bid

SINGAPORE (BLOOMBERG) - Bondholders are suffering as a Singapore-listed fishmeal supplier's bankruptcy filing flags doubts among lenders that it will extract enough value from its assets in Peru to repay creditors.

China Fishery Group filed for protection under Chapter 11 of the US bankruptcy code on June 30, stoking a 10.5 cent drop in its 2019 notes - set for the worst month since November. The group told investorson July 21 that bids for its fishery business in Peru - its single most valuable asset - peg the business at about half the US$1.7 billion valuation it received last year, according to Suresh Nair, a partner at law firm Advocatus LLP.

"The recovery prospects ultimately hinge on whether China Fishery is able to sell the Peruvian assets," Yee Man Chin, primary analyst at Fitch Ratings in Hong Kong. "The company has gone into bankruptcy protection and they haven't been able to provide any update on the sale of the assets, so there is a huge amount of uncertainty as to whether it will ultimately happen."

Other companies connected to Singapore or its bond market have also dealt blows to creditors. Some of the worst Asian failures including Celestial Nutrifoods Ltd left bondholders with as little as 5 to 17 per cent recovery, a grim reminder for investors in Singapore-listed firms with distressed debt. China Fishery's lenders said in a July 8 court filing that the firm's Chapter 11 filing has derailed efforts to sell the Peru assets and maximize value for stakeholders.

China Fishery's US$300 million of 2019 notes slid 1.3 cents to 53.5 cents on the dollar as of 3:13 pm in Hong Kong, according to Bloomberg-compiled prices on Wednesday (July 27). The S$200 million 2017 notes, sold by its parent Pacific Andes Resources Development Ltd, fetched 20 cents on the local dollar. Both companies defaulted on their notes in the first quarter.

China Fishery's distress offers lessons for money managers investing in seemingly good businesses that somehow run aground, according to Raymond Chia, Singapore-based head of credit research for Asia excluding Japan at Schroder Investment Management Ltd. It counted the Carlyle Group among its biggest shareholders until August last year.

"They had a good story, a reputable equity investor, and a good reputation with investors in calling back their bonds back in 2011, and even enjoyed some rating upgrades," he said. "Business-wise, not much has changed, yet they have defaulted today. The challenge is for investors to really understand why some Chinese high-yield companies failed."

Investors usually agree to restructure the bonds they hold in a company when the company is still a going concern, according to Neel Gopalakrishnan, an emerging-market credit analyst in Singapore at Credit Suisse Private Banking. "Even restructuring has significant implementation risk and is a long process, with substantial losses for investors in many cases."

Noteholders have watched the value of their stake erode since August, when authorities in Singapore and Hong Kong started probing an undisclosed securities offence. HSBC Holdings sought to wind up and liquidate the company in November, and behind-the-scene negotiations with banks set a July 15 deadline for the sale of its Peruvian assets. China Fishery pre-empted the sale by filing for Chapter 11 without informing its chief restructuring officer, its lenders complained in their July 8 US court filing.

"The possibility of a sale of all or part of the Peruvian fishmeal business remains, but the process is now not limited to a single short-term strategy" dictated by lenders, said Geoffrey Walsh, a Hong Kong-based spokesman for Pacific Andes Resources. "There is now the opportunity to consider a range of strategies to derive the highest possible value from the assets."

The July 21 meeting was held with Pacific Andes Resources's Singaporean bondholders, who have not suffered from China Fishery's Chapter 11 filings, Pacific Andes said in a statement on Wednesday. They were advised that a forced sale of its Peruvian fishmeal business within a short time frame would be equivalent to a "fire sale" and would be "very negative" for their investment, it added.

Fitch, which has cut its grade on China Fishery five times since April 2015, has given it a recovery rating of RR4, which historically denotes a 31-50 per cent recovery in principal and related interest. If Fitch is right, China Fishery's bond price suggests investors are still be too optimistic on the outcome.

The current price of the bonds "reflects the latest uncertainty in creditor claims following the bankruptcy filing, which was not meant to hurt bondholders or its ability to pursue asset sales," said Terence Lin, assistant director of bonds and portfolio management at the Singapore-based fund researcher iFast Corp. "There's not too much optimism now."