Pigs in the middle

This little piggy went to market

When a major private sector firm goes under in China, investors often turn their attention to the health of its crosstown counterparts. In 2012 we reported on how troubled borrowers had created financial contagion in Zhejiang province, thanks to mutual guarantee deals between local firms (see WiC157).

Five years later, a chain reaction was triggered after a financial debacle in another province, Shandong (see WiC376).

There’s no hard evidence that another vortex of debt is forming in Jiangsu, although some of the leading company names in the affluent province, such as Suning and Sanpower, were caught up in financial trouble last year.

The first firm to crack, however, has proven to be Yurun. Founded by Zhu Yicai in 1991, it had grown into one of the country’s biggest pork firms by 2005 when its meat processing unit Yurun Food went public in Hong Kong (for our first mention ovf Zhu in early 2010, see WiC47). The tycoon also led the unlisted parent Yurun Group in an ambitious expansion into pig farming and property.

Yurun first got into trouble in 2015 when Zhu was detained by the authorities on bribery allegations. Its business operation was actually sound but its financial health was hampered as rattled lenders drained liquidity from the pork firm.

Then in early 2019 – coincidentally the Year of the Pig in the Chinese lunar calendar – Zhu was released from four years of house arrest, Beijing Youth Daily reported. But his return didn’t avert Yurun’s slide as creditors successfully applied for court approval to put the group into a bankruptcy restructuring process in November 2020.

At the time, 122 subsidiaries of the group filed for bankruptcy – some listed, some unlisted, and some with overlapping business interests. They had amassed combined debt of Rmb108 billion ($17 billion). Yurun still has Rmb63 billion in assets on paper although court documents hint that creditors might only generate about Rmb29.2 billion in proceeds from a fire sale.

After nearly a year of negotiation, both Yurun Group and Yurun Food have announced in the past month that creditors have voted overwhelmingly for a restructuring proposal. The most serviceable assets of the 122 Yurun units will be restructured into a new vehicle called ‘Yurun Quality’. In a rather localised means of ranking repayment priority, more junior creditors – mostly SMEs or individuals owed less than Rmb300,000 – will be paid off immediately. Debts above that but below Rmb3 million will be repaid within five years. Creditors owed more than Rmb3 million will receive stakes in Yurun Quality.

As a result, creditors have ended up holding a stake of about 37% in Yurun Quality. Zhu will maintain a 33% share (and 56% of voting rights), while a strategic investor, in the form of state-owned bad asset specialist Huarong, will take up 7% (the remaining shares largely go into an incentive scheme for Yurun’s senior executives).

Most creditors have also signed up to a “betting clause” – a guarantee from Zhu that Yurun Quality’s net profits will top Rmb5 billion by 2026 and that the new company will file for an IPO within a year of that. Should Zhu fail to deliver on this pledge he will need to repurchase – in cash – the creditors’ stakes in Yurun Quality.

The proposal has received the backing of the Nanjing and Jiangsu local governments, Xinhua reports, and stakeholders have found a way to move forward. Zhu retains control of his company, which in turn continues to support 100,000 jobs. Yurun Food does not need to go bust. Its Hong Kong-listed shares surged more than 25% on the day subsequent to overseas creditors approving of the proposal.

Of course, all of the above could only happen on the back of major concessions from creditors. Time will tell if they will be rewarded with Yurun Quality’s prospective IPO (which, in turn, will be depend on its growth under Zhu’s management). Meanwhile, Yurun’s stay of execution will offer another model for other Chinese firms mired in financial distress, should they too undertake bankruptcy restructurings.

China Evergrande’s investors and creditors will be taking note…

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