M&A

Hanging by a thread

Shandong Ruyi counts the costs of its overseas acquisition spree

Qiu-Yafu-w

Less in fashion these days: Qiu

After a 60% spike in LVMH’s market value last year, Forbes magazine has calculated that Bernard Arnault, the founder and boss of the luxury goods behemoth, is now the world’s richest man – with a net worth close to $120 billion.

Shandong Ruyi Group has tried to cultivate a reputation in recent years as China’s answer to LVMH. But instead of featuring in the ‘rich lists’, the textile firm’s boss Qiu Yafu (see WiC399) is probably more worried about his name popping up on the laolai ranking – a database of ‘discredited individuals’ compiled by the local courts.

According to a report by news portal Jiemian last month, Ruyi breached at least 10 court orders last year in relation to debt repayments amounting to Rmb480 million ($69 million). Yet Qiu and his company Ruyi seem to have avoided mention on the laolai list for now, implying that the group has repaid or rolled over its liabilities after warnings from the court.

(The courts usually give debtors a grace period after ruling on a dispute. A person or company is only added to the Supreme Court’s laolai list – a database that is available to the public – should the wrongdoer continue to default after receiving a court order. In March last year, the Global Times said that more than 13 million entities were named and shamed in this way.)

Ruyi was clearly struggling with a liquidity crunch at the end of last year. The Financial Times also reported this month that the Shandong firm was added to another blacklist compiled by the International Cotton Association, when Ruyi failed to pay compensation to a Bangladeshi group pursuant to an arbitration award.

The Shandong firm is a major buyer of cotton and it spent nearly $4 billion in recent years acquiring a clutch of global brands including Paris-based SMCP, as well as UK clothing makers Aquascutum and Gieves & Hawkes. A major deal to purchase the Lycra brand was also concluded in January 2019.

The strategy was to grab Western labels and develop them in its home market but the spending spree has left Ruyi financially overstretched.

The cotton association’s award is significant as it looks set to affect Ruyi’s ability to buy cotton from major international suppliers and squeeze production volumes at its brands, the FT reported.

Ruyi’s US dollar bonds fell to records low in early December amid a slew of credit rating downgrades. The situation looked dire when S&P withdrew its CCC+ rating (designating junk or speculative bonds) reportedly at the firm’s own request.

A number of Chinese credit agencies are still giving Ruyi’s debt higher ratings, based on the financial support on offer from the local government of Jining, Ruyi’s hometown (it bought a 26% in Qiu’s firm for Rmb3.5 billion and is said to have offered to guarantee Ruyi’s domestic bonds).

This backing from the “national team”, Caijing magazine said, has helped Ruyi survive the year-end credit crunch but it isn’t a long-lasting solution for a company that set out to build a “national luxury fashion brand”.

Caijing also reports that a number of Ruyi’s overseas acquisitions, including the $2.6 billion takeover from Invista of the Lycra brand, were partly financed by the Shandong provincial government. The amount of funding (Rmb400 million for the Invista deal) may not look that significant, the magazine noted, but it had served as a seal of ‘official approval’ that helped Ruyi leverage up its borrowing from state banks.

Ruyi must now make good on a significant proportion of short-term liabilities, due to mature in a year or less.

“It remains uncertain whether the acquisitive firm will switch to a divestment mode [in order to survive]. What is certain is that its overseas shopping spree has come to a stop,” Caijing concluded.


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