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BEIJING - US motorcycle maker Harley-Davidson will recall 335 motorcycles exported to the Chinese mainland after discovering potential brake problems.
The recall, starting on Sept 2, involves the 2014 Touring and CVO Touring models, a statement on the website of General Administration of Quality Supervision, Inspection and Quarantine said.
The recall comes after a potential safety risk from the bikes' front wheels locking up as a result of a build-up of brake fluid due to the front brake line being pinched between the vehicles' fuel tank and the frame, the statement said.
These exported motorcycles were produced between July 1, 2013 and May 7, 2014, it said.
The recall will be conducted by the Harley-Davidson (Shanghai) Commercial and Trading Co., Ltd. The company will fix the affected bikes for free.
BEIJING - Chinese banks are under increasing pressure to reform under conventional business structures amid lackluster first-half profit data.
Net profits of the state-owned Industrial and Commercial Bank of China, the nation's largest lender, stood at 148.4 billion yuan (24.1 billion US dollars) in the first half, up 7.2 percent year on year. However, the growth rate went down 5.2 percentage points from that a year ago.
Profit growth for the other four major state-owned banks, including China Construction Bank, Agricultural Bank of China (ABC), Bank of China, and the Bank of Communications (BOCOM), respectively stood at 12.65 percent, 10.97 percent, 9.17 percent, and 5.59 percent, which were all slower from a year earlier.
Analysts said the impact from interest rate liberalization and booming Internet finance has reduced banks' revenues from interest rate margins, a traditionally important source of profits for banks.
Even though interest rate margin-based revenues decreased during the first half, they remained a major power in generating profits for the banks. More than 70 percent of ABC and BOCOM's business revenues came from interest income.
Gone is the era where banks can gain easy and fat profits, said Zhao Xijun, vice president of the School of Finance under the Renmin University of China.
ABC Vice President Lou Wenlong said narrowing revenues from interest rate margins will force banks to diversify business and focus on non-interest sectors.
In contrast, smaller banks fared relatively better than the big banks. First-half net profits for China Merchants Bank and Shanghai Pudong Development Bank grew 15.94 percent and 16.87 percent, respectively.
China Merchants Bank said its non-interest income reached 28.3 billion yuan in the first half, up 87.7 percent year on year, as the company sought growth potentials in wealth management, credit cards, international factoring and letter of guarantee businesses.
According to the bank, its net non-interest income has accounted for more than 35 percent of its net business revenues during the period, up 10.5 percentage points from a year ago.
Meanwhile, Chinese banks were challenged with a rise in non-performing loan (NPL) ratios in the first half, with ABC's NPL ratio reaching 1.24 percent as of the end of June, the highest among the 16 banks.
Official data showed that the average NPL ratio in the country's banking sector was 1.08 percent by June, up 0.08 percentage points from the start of the year.
National Development and Reform Commission (NDRC) Tuesday announced that Zhejiang Insurance Industry Association and 23 provincial level insurance companies have been fined more than 110 million yuan ($17.89 million) for fixing new car insurance discount and other anti-competitive practices.
The NDRC dropped its investigation of nine insurance companies, including American insurance company Liberty Mutual Insurance Group's subsidy in Zhejiang and Japanese Aioi Insurance Co, when it discovered they were not involved in price-fixing.
Top 10 insurance companies in China Top 5 richest people in Chinese mainland
Shenyang Customs said on Monday that total import and export value of Liaoning province reached 411.2 billion yuan ($66.95 billion) in the first seven months of 2014, a year-on-year increase of 3.4 percent. The growth is 3.2 percentage points higher than the national average.
According to the Customs, steady growth trend of the province benefited from five advantages - enhanced independent development capability of foreign trade enterprise, competitiveness of labor intensive products' export, stable demands for imports, rapid growth of foreign investment and economic cooperation, and rapid growth of foreign investment in actual use.
In the first seven months, the total import value of Liaoning province reached 193.8 billion yuan, a year-on-year increase of 9.8 percent, 10.6 percentage points higher than the national average.
In the first six months, foreign investment in actual use hit $15.99 billion, up 9.7 percent, which concentrated in the industries such as modern service, equipment manufacturing and so on.
Top 5 richest people in Chinese mainland Supercars turn the heat at Chengdu Motor Show
CHONGQING - Chinese oil giant Sinopec Group ranked first on the 2014 edition of the Top 500 Chinese Enterprises list, marking the tenth year that the company has held the title.
Sinopec Group took the lead with total revenues of 2.95 trillion yuan ($478.24 billion), according to the list released on Tuesday by the China Enterprise Confederation and the China Enterprise Directors Association.
It was followed by another oil company, China National Petroleum Corporation, and State Grid, China's largest electric utilities company. They were joined by seven other state-owned enterprises (SOEs) to complete the top 10, including another oil giant, a construction group, a telecom operator and four major banks.
The enterprises in fourth to tenth place were, in order, Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, China State Construction, China Mobile, Bank of China and China National Offshore Oil Corporation.
The list was compiled based on revenues of Chinese enterprises in 2013. All companies on the list had revenues above 20 billion yuan. The lowest-ranked company had revenues of 22.86 billion yuan, 2.99 billion yuan higher than the company in the 500th spot last year.
Combined revenues of the companies totaled 56.68 trillion yuan, up 13.31 percent year on year and roughly equal to the country's 2013 GDP of 56.88 trillion yuan.
The top three companies saw their revenues exceed 2 trillion yuan, while another 131 firms surpassed 100 billion yuan, according to the list.
The 500 companies raked in combined profits of 2.4 trillion yuan in 2013, 10.6 percent higher than the previous year.
However, their profitability slipped 0.1 percentage points to 4.24 percent, and their return on assets edged down 0.08 percentage points to 1.36 percent. Both indicators have dropped for a third straight year.
Of the 300 SOEs on the list, 42 posted combined losses of 72.66 billion yuan in 2013. In sharp contrast, only one of the 200 private companies reported losses in the same period, which totaled 50 million yuan.
Of all the 43 firms with losses, 17 were engaged in the coal industry, 7 were in the iron and steel sectors, and 7 were in non-ferrous metals.
Aggregate revenues of the SOEs increased at a slower pace of 10.6 percent year on year, with net profits up 5.84 percent from a year ago.Private firms performed better, with their revenues jumping 14.51 percent and net profits up 17.62 percent from the previous year.
Top 10 oil giants by output in the world Sinopec, Yhd ink branding deal
Liu Chuanzhi, Chairman of Legend Holdings Ltd, speaks at an event of the 2014 Annual Summit of China Green Companies in Nanning city, south Chinas Guangxi Zhuang Autonomous Region, April 20, 2014. [Photo/IC]
Legend Holdings raised investments totaling tens of millions of yuan with two partners in Chinese Internet finance company Beijing Oriental Wealth Information Co Ltd, the two parties jointly announced on Tuesday.
This is the Series A financing of Beijing Oriental Wealth Information Co Ltd, with Legend Holdings accounting for 10 million yuan ($1.6 million).
The funds will be used to recruit talent and perfect risk control and brand management, Wang Pengcheng, CEO of Beijing Oriental Wealth Information Co Ltd, told China Daily.
Beijing Oriental Wealth Information Co Ltd mainly operates Yindou.com, a person-to-company lending platform. It went online in January this year, and trading volume reached more than 200 million yuan by August 22. The number of registered users has been about 30,000.
Wang Mingyao, executive director of Legend Star, a member company of Legend Holdings, said that Yindou.com is different from peer-to-peer lending companies because all the debt products are in line with guarantee companies and the borrowers are companies rather than individuals.
By the end of July, there were 1,283 Internet lending companies and the trading volume would total 250 billion yuan in the full year of 2014, according to data from wangdaizhijia.com.
Platform created for China (Shanghai) Pilot Free Trade Zone (FTZ) went online on Tuesday to offer services to China's domestic companies planning to target overseas markets.
The platform, co-developed by the FTZ management committee and Shanghai UDC Business Consulting Co Ltd, will be able to help companies register and trace their application process online. Companies can also share their updated information on this platform. The local authorities will provide overseas investment guidance to companies in six stages via this platform.
Dai Haibo, executive deputy director of the FTZ management committee, said 2014 will become a turning point for China in terms of investment, as the amount of capital flowing out will outnumber the capital pouring in.
"This trend is also visible in the FTZ as companies are displaying huge appetite for investing in overseas markets. Therefore, we have come up with this platform to provide all necessary services to these companies," he said.
Meanwhile, the revised version of FTZ's English website was also released on Tuesday. With this updated version, overseas investors will be able to obtain the most recent FTZ information which is synchronized with FTZ's Chinese official website. In addition, the FTZ's application program for mobile users also went online on the same day.
Supercars turn the heat at Chengdu Motor Show New uniforms highlight Xiamen Airlines
A lady gazes at the screen to monitor the change in stock market, Huibei city, Anhui province, Sep 2, 2014. [Photo/Asianewsphoto]
HONG KONG - Shanghai shares closed at their highest in 15 months on Tuesday as investors bet funds freed from last week's initial public offering (IPO) subscriptions, selecting stocks expected to benefit from state firm reforms and the coming equity link between Shanghai and Hong Kong.
The Shanghai Composite Index climbed 1.37 percent to 2,266.05 points, highest close since June 5, 2013. The CSI300 of the leading Shanghai and Shenzhen A-share listings closed up 1.3 percent to its highest since mid-December.
Defence stocks were the key outperformers for a third day, lifted by reform hopes in the sector. China Avic Electronics jumped 5.6 percent, and China Spacesat soared the maximum allowed 10 percent.
Kweichow Moutai led gains among Chinese liquor makers with a rise of 2.6 percent. Shares of the sector leader were among those recommended by Goldman Sachs in its latest report, which said the stock would benefit from the coming cross-border equity link.
The Nasdaq-style ChiNext Composite Index of mostly high-tech start-ups listed in Shenzhen added 1.2 percent to a fresh record high.
Xiao Gang, China's top securities regulator, said on Monday the Shenzhen exchange should continue to expand the Small & Medium Enterprise (SME) board and speed reforms for the ChiNext, the securities regulatory body said on its website.
Top 10 newsmakers who rocked China's stock market Top changes at Shenzhen bourse
Guangzhou City Construction & Development Design Institute Co signed an agreement on Tuesday with Australian company Independent Management Group to forge a strategic alliance for senior living business.
The two sides will share expertise in planning, design, management and service related to senior living, said Li Wei, president of Guangzhou Institute, which is wholly owned by Guangzhou-based and Hong Kong-listed developer Yuexiu Property Co.
The senior living industry has a huge potential in China. The number of people aged 60 or above passed 200 million last year, said Huang Weigang, deputy general manager of Yuexiu Property.
The elderly need public services that are supported by related government policies and growing personal wealth, he said.
Guangzhou Institute has been involved in the design of some nursing homes in Guangzhou and Yuexiu Property set up a seniors housing research center last year.
Yuexiu Property plans to launch pilot projects in the near future to renovate some clubhouses in communities and turn them into day centers for seniors.
It hopes to bring in expertise to help plan and operate such centers, Huang said.
The number of valid trademarks registered in China totaled 7.61 million by the end of June, data from the State Administration for Industry & Commerce (SAIC) showed on Tuesday.
The SAIC had received over 14 million trademark applications as of June. China has led the world in the number of trademark applications since 2002.
Zhang Mao, director of the SAIC, downplayed the surging number of trademarks, saying only a small proportion of Chinese brands are recognized in the international market
He pointed out that Chinese enterprises still rely too much upon cost advantage. Zhang added that only 20 percent of export-oriented firms have their own brands and just 11 percent of China's exports are sold under domestic brands.
As the "world's factory," China has been eager to improve its innovative abilities and export more products created in the country rather than simply bearing the "made in China" label.
The country's revised Trademark Law went into effect in May to streamline registration procedures and improve protection.
Zhang promised more efforts to safeguard intellectual property, including trademarks, especially well-known brands, which are more vulnerable to "malicious" trademark registration.
He also pledged to increase penalties for trademark infringement, such as demanding more punitive compensation.
Cartons of milk produced by Modern Farming (Group) Co Ltd, parent company of China Modern Dairy Holdings Ltd, are for sale at a supermarket in Beijing, China, October 4, 2012.[Photo/IC]
US private equity firm KKR & Co LP has sold its remaining stake in China Modern Dairy Holdings, raising around $80 million, a source with direct knowledge of the matter said.
KKR sold around 168 million shares at HK$3.70 per share versus Monday's closing price of HK$3.85, the source told Reuters on Tuesday.
China Modern Dairy announced interim after tax profit for the six months ended June 30 of 545 million yuan ($88.7 million), an increase of more than three times on the previous year.
KKR confirmed the sale without giving further details.
"We are very proud of the partnership we have had with Modern Dairy since 2007 in supporting their efforts to provide safe and healthy drinking milk to Chinese consumers," said Julian Wolhardt, Member of KKR.
Woldhardt added that KKR remains a believer in the long-term growth of China's dairy sector. The New York-based firm is an investor with China Modern Dairy and private equity firm CDH Investment in Asia Dairy, a dairy farm venture established in 2013 to meet China's rising demand for premium milk products.
KKR and CDH initially bought stakes in China Modern Dairy after the country's milk industry was battered by a 2008 scandal involving chemical-laced products. KKR paid $150 million in cash for a 34.5 percent stake.
After Modern Dairy's 2010 IPO and the sale of a stake to Mengniu last year, KKR almost tripled its original investment, Reuters previously reported.
China Modern Dairy grew its herd from 24,000 dairy cows and three farms to around 180,000 dairy cows and 22 farms during the five years after KKR and CDH invested.
Top accounting firm Deloitte China released a Technology Fast 20 list for Chengdu High-Tech Zone on August 29, announcing its selection of the top 20 fastest-growing high-tech companies in the high-tech zone.
The top 20 firms saw a huge 620 percent average increase in business volume in the past three years. The top 5 saw a jump of 1,530 percent on average. Tap4Fun, a leading mobile game company, tops the list with a growth rate of 4,638 percent.
The ranking, which began in 2012, is a sub-project of the Deloitte Technology Fast 50 China selection. Over three years, a total of 51 companies have been selected. The winners are qualified to participate in the selection of the Deloitte Technology Fast 50 China program.
Last year, eight companies from Chengdu High-tech Zone made the Technology Fast 50 China list. Two companies made the Fast 100 Asia-Pacific list.
American Saleen 7 "supercar" with scissor doors on display at the Chengdu Motor Show 2014 in Chengdu, capital of Sichuan province, Aug 29, 2014. [Hao Yan/chinadaily.com.cn]Delicate but grueling work Hongyuan Airport opens in Sichuan Top 10 largest public firms in the world
Audi's new S8, a luxury sports sedan, on display at the Chengdu Motor Show 2014 in Chengdu, capital of Sichuan province, Aug 29, 2014. [Hao Yan/chinadaily.com.cn]Delicate but grueling work Hongyuan Airport opens in Sichuan Top 10 largest public firms in the world
Bentley Continental GT V8 S on display at the Chengdu Motor Show 2014 in Chengdu, capital of Sichuan province, Aug 29, 2014. [Hao Yan/chinadaily.com.cn]Delicate but grueling work Hongyuan Airport opens in Sichuan Top 10 largest public firms in the world
Corvette sports car on display at the Chengdu Motor Show 2014 in Chengdu, capital of Sichuan province, Aug 29, 2014. [Hao Yan/chinadaily.com.cn]Delicate but grueling work Hongyuan Airport opens in Sichuan Top 10 largest public firms in the world
Maserati's GranCabrio MC on display at the Chengdu Motor Show 2014 in Chengdu, capital of Sichuan province, Aug 29, 2014. [HaoYan/chinadaily.com.cn]Delicate but grueling work Hongyuan Airport opens in Sichuan Top 10 largest public firms in the world
BEIJING - An American business group warned Tuesday that foreign companies in China feel increasingly targeted for enforcement of anti-monopoly and other laws and said investment might decline if conditions fail to improve.
The American Chamber of Commerce's report adds to mounting complaints about a flurry of investigations of global automakers, technology suppliers and other companies in recent months.Foreign companies believe they face "selective and subjective enforcement" of anti-monopoly, food safety and other rules, said the American Chamber of Commerce in China.
Almost half of companies responding to a survey "believe that foreign companies are being targeted," the group said. It said the risk was increasing that China "will permanently lose its luster as a desirable investment destination."
"Improvements in these areas are imperative if foreign companies are to continue to invest in China's future," the group said in a statement.
Uncertainty over regulatory investigations adds to challenges for foreign companies at a time when China's growth is slowing and they face more competition from ambitious local rivals.
Economic growth edged up to 7.5 percent over a year earlier in the three months ended in June from 7.4 percent the previous quarter. But that was barely half of 2007's peak of 14.2 percent.
Beijing announced last week it will fine 12 Japanese auto parts suppliers a total of $202 million on charges of price-fixing. Officials have said Mercedes Benz, Audi and Chrysler also will face punishment. Microsoft and chip maker Qualcomm also are under scrutiny.
Business groups welcomed the enactment of China's anti-monopoly law in 2008 as a step toward clarifying operating conditions.
Another business group, the European Union Chamber of Commerce in China, said last month that competition law should not be used to achieve other goals such as forcing price reductions.
Tourists select cosmetics at Sanya Haitang Bay International Shopping Mall, which started business on Monday in the island province Hainan. Boasting 300 international brands, the 72,000-square-meter mall is the world’s largest duty-free shop, according to Wang Weimin, president of China International Travel Service Group, the mall’s investor. [Photo by Huang Yiming / China Daily]
Haitang Bay International Shopping Center, the world's largest duty-free shop located in China's Hainan province, opened its doors on Monday.
The 72,000-square-meter shopping mall, backed by a 5-billion-yuan ($814 million) investment by the China International Travel Service Group Corp, carries nearly 300 international brands and fashion labels such as Louis Vuitton, Chanel and Lancome.
For the first time in China, more than 10 high-end brands will open duty-free shops on the mainland, including Rolex, Prada and Giorgio Armani.
Wang Weimin, president of the China International Travel Service Group Corp, said the shopping mall will become a new island landmark.
"The Sanya Haitang Bay International Shopping Center is the world's largest DFS, with the biggest brands and the most complete items," said Wang. "Besides shopping, customers can also enjoy entertainment venues, restaurants and hotels at the mall."
He Xiqing, deputy governor of Hainan province, said offshore duty-free policies have contributed greatly in promoting the province as a tourism destination.
"By July 2014, the DFS income in (the Hainan cities of) Sanya and Haikou exceeded 9 billion yuan, with the number of customers surpassing 10 million," said He.
In April 2011, the State Council, China's Cabinet, permitted a duty-free shopping program in Hainan on a trial basis to attract more tourists.
In 2012, tourism revenues in Hainan reached nearly 38 billion yuan, up 17 percent year-on-year. In 2013, more than 36 million customers visited Hainan and made more than 3.4 billion yuan ($538 million) in purchases of duty-free goods.
Visitors above the age of 16 are allowed to buy a maximum of 8,000 yuan in duty-free goods in Hainan with each visit.
"Compared with the previous DFS, the one in Haitang Bay has a better environment and provides more choices," said Song Yanan, a Sanya resident born in the 1990s. "But you also need to stand in a queue because there are too many people."
"Most of the items sold in Haitang Bay are more expensive than those in Singapore, about 50 yuan higher," said Nitin Tandra, a customer from India. "But that's not too much. The shopping experience will be better if some sellers improve their attitude."
According to the provincial government, the former duty-free mall in Sanya has ceased its operations on Monday. Revenues from the former duty-free mall accounted for 10 percent of the city's total tourist revenue in 2012 and 12 percent in 2013.
Another duty-free mall at the Meilan Airport in the provincial capital of Haikou will be expanded to carry more international brands. The airport's duty-free mall has the largest shopping area for watches and chocolates among Asian airports.
Customers select jewelry in Haitang Bay duty-free shopping center in Sanya, South China's Hainan province September 1, 2014. [Photo/Xinhua]
A general view of Haitang Bay duty-free shopping center in Sanya, South China's Hainan province. [Photo/Xinhua]
A general view of Haitang Bay duty-free shopping center in Sanya, South China's Hainan province. [Photo/Xinhua]
A general view of Haitang Bay duty-free shopping center in Sanya, South China's Hainan province. [Photo/Xinhua]
Low rainfall and scorching heat in recent months have caused severe drought in a number of China's major crop producing regions, some of which are facing the worst drought in over half a century. Concerns about China's food security dominate discussions on the drought, but a more likely threat is the drought's negative impact on the incomes of farmers, especially poor smallholders.
According to recent news reports, severe drought has hit about a dozen provinces and regions in North China and the northeast plains. For example, rainfall levels in Henan province are reported to be about 60 percent of the past two decades' average, the lowest since 1951. This is serious because Henan accounts for 10 percent of China's cereal production, including a quarter of wheat and 9 percent of corn production. Local officials estimate that recent drought conditions are responsible for economic losses of up to 7.3 billion yuan ($1.2 billion), with 97 percent of these losses suffered by the agricultural sector.
Severe drought has also been reported in Northeast China's Liaoning province and North China's Inner Mongolia autonomous region, which produce about 7 and 9 percent of China's corn. According to the Flood Control and Drought Relief Headquarters, severe drought has affected about 5 million hectares of farmland and left 1.6 million people without adequate water supply.
The Chinese government has a number of policy options to mitigate the possible threat to food security and lessen the damage to farmers' livelihoods in the short and long term. China has large corn stocks that can be released to the market. According to Food and Agriculture Organization estimates, China's corn stocks this year are 27 percent higher than the 2011-2013 average. The government bought these grains above market prices as part of its growing portfolio of interventions to protect and provide support to farmers.
Increasingly integrated international markets and trade channels are also an effective and efficient tool to offset drought-related agricultural production and supply shocks. The United States recently announced that it expects record corn and soybean harvests in the coming months. As a result, international prices of US corn fell to their lowest levels since August 2010, with current prices nearly half of their peak 2011 levels; international soybean prices too have fallen in recent weeks. China can thus benefit from the US bumper harvest to fill the gap between domestic agricultural supply and demand through imports.
In the long term, China can take advantage of its comparative advantage in labor-intensive and high value agricultural products by shifting its exports toward fruits, vegetables and aquatic products, while importing more land-and water-intensive products such as cereals and vegetable oils. Such a shift requires appropriate tools and infrastructure to provide farmers with market information, training and financial services, especially focusing on smallholder farmers.
Low-income households in rural areas have a small asset base, so shocks like droughts deliver a disproportionately harder blow to their livelihoods than urban households. In the short term, income support policies are needed to protect drought-affected smallholder farmers who are unable to access mainstream social safety networks. Such schemes need to be carefully designed, and the managing officials should be monitored and held accountable for lapses. Also, short-term social safety nets should be linked to efforts that promote long-term asset and capacity building of farmers.
Resilience strategies are needed in the long term to help farmers deal with extreme weather conditions such as floods and droughts, including adjusting sowing dates and introducing drought- or flood-resilient crops. Improving infrastructure such as irrigation systems, pumps, storm drains, rainwater collection centers and emergency shelters will increase community resilience to extreme weather events. Crop insurance programs, too, should be strengthened through yield or weather indices to help reduce the impact of natural disasters on rural people's incomes.
Moreover, the government needs to accelerate inter-ministerial integration to pool resources and information to provide a coherent, well-informed and cohesive disaster early warning system and response. Given China's booming non-farm sectors, some smallholder farmers should be supported in shifting from agriculture to non-farm sectors (both rural and urban), while others could be helped to realize their potential to undertake profitable commercial activities in agriculture.
Extreme weather events such as droughts are becoming more the norm than the exception because of climate change. Transparent, accountable and well-defined disaster management policies and institutional channels are needed to help cushion the short-term impacts of natural disasters as well as to improve access to productive resources that offer long-term opportunities to build resilience among the most vulnerable groups.
The author is director general of International Food Policy Research Institute.
United States-based hedge and private equity funds rely on the stability of the laws of the US to make acquisitions of distressed companies, deleverage them and improve operations with the goal of selling them for multiples of the original purchase price.
Funds are willing to commit billions of investment dollars because the US Bankruptcy Code is a stable set of laws that allows participants to understand the risks and rewards.
While few barriers exist to buying US companies and their assets, there are only a handful of China-based funds that actively participate in the distressed market. One such fund is Sailing Innovation US Inc, a partially government-sponsored collaboration between Chinese investment firm Sailing Capital Overseas Investment Fund LP and Chinese conglomerate Sanpower Group. But there is no reason why more China-based funds cannot also participate.
Perhaps the most widely known strategy is a "363 sale", which authorizes a debtor to sell assets "free and clear" of all liens, claims and liabilities. This strategy was used by General Motors Co and Chrysler Group LLC to sell their businesses to the US government during the 2008 market collapse. The hallmark of a 363 sale is an open auction where any willing buyer can make a bid, usually measured against a so-called stalking horse bid from a purchaser preselected by the debtor. Because the stalking horse bidder has usually expended resources conducting due diligence, it will often enjoy certain court-approved bid protections.
But an open auction is not the optimal vehicle for the other bidders. Not only is it possible to pay too much for assets, the other bidders will need to pay their own expenses. The recent 363 sale of specialty retailer Brookstone Inc provides a relevant case study. Before filing for bankruptcy, Brookstone selected SBP Acquisition, an affiliate of Spencer Spirit, as the stalking horse based upon its offer valued at $146.3 million. Brookstone then filed for bankruptcy and commenced a 363 sale seeking approval of SBP as the stalking horse bidder and a $3.7 million breakup fee.
At the auction, China's Sailing Innovation appeared with a bid of $173.4 million in cash, new notes and assumed liabilities and was declared the winner after a single round of bidding. The bid was surprising since in January 2014, Brookstone's chairman stated that it was unlikely a sale would result in more than $100 million. Whether the purchase price is more than what Brookstone was worth will be determined by the market over time.
But SBP and Sailing had other strategies they could have considered to acquire control of Brookstone.
Funds may consider acquiring all or a controlling share of a target company's undersecured debt from existing holders at a discount to par. Upon the company's default of any of its debt obligations, the fund may negotiate with the company to convert its debt into new equity.
Once a deal is reached, the fund may require the company to install a new fiduciary to improve the company's business operations.
US debt securities usually require unanimous consent by the lenders to convert their debt to equity. If unanimous consent cannot be achieved, the Bankruptcy Code will bind nonconsenting holders to a plan of reorganization so long as one-half plus one in number and two-thirds in amount of those holding the same security vote in favor.
Funds may also consider buying a company's fully secured debt. Upon default, the fund may consider foreclosing on the assets outside of bankruptcy. Here, the fund is not taking control of the company's operations, just certain assets. Should the company seek bankruptcy protection prior to the consummation of the foreclosure, the bankruptcy code provides significant protection to secured creditors.
Buying debt backed by a pledge of a parent company's stock in operating companies is another option. Upon default, the lender may foreclose on the equity interests virtually immediately. Upon foreclosure, the lender will own the equity of the subsidiaries, but will not cleanse the company of any liabilities, including any subsidiary guarantee of parent obligations.
These are only a few examples of the strategies US funds consider when evaluating whether to make an acquisition of a distressed company. But before an acquisition is made, funds conduct their own analysis. Funds will also consult with legal counsel to analyze the governing debt documents and help identify other legal risks and hire independent financial advisers to test the fund's models and potentially provide court testimony.
The US distressed investing market is mature and those that participate need to understand and follow the rules of the game. Investors that do not can be penalized. But those who successfully navigate them, and use the proper acquisition structure, can reap rewards measured in multiples of their initial investment.
Ted Osborn is a partner at PricewaterhouseCoopers (Hong Kong) and Geoffrey Raicht is a partner at Proskauer Rose LLP (New York). The views do not necessarily reflect those of China Daily.