Asia Aluminum: AA Investments PIK noteholders file motion to have companies exited from provisional liquidation

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AA Investment’s PIK noteholders have filed a motion to discontinue a winding up of the company and its subsidiary, Asia Aluminum Holdings, and to have the provisional liquidator removed, sources told Debtwire.

Holders of Asia Aluminum’s USD 450m bonds, said they were informed by the provisional liquidator, Ferrier Hodgson, of the PIK noteholders’ motion via an email sent late Wednesday, 3 June.

In doing so, the PIK noteholders, which have total claims outstanding of approximately USD 800m, are seeking to take control of the process to sell and/or restructure the Asia Aluminum group of companies, the bondholder sources said.

The PIK noteholders’ motion is to be heard by a Hong Kong court on 8 June, the bondholders said.

As a first step in their efforts to wrest control of the Asia Aluminum group from the provisional liquidator, the PIK holders in early May appointed KPMG as a receiver of the Bermuda-registered shares in AA Investments and Asia Aluminum Holdings, the offshore parents of the group’s operating companies in China.

As reported, the PIK noteholders believe that, in seeking to sell key assets of the Asia Aluminum group to Golden Concord Pacific , the provisional liquidator had not allowed for a competitive bidding process to take place.

In its report presented to creditors on 8 May, the provisional liquidator estimated that PIK noteholders would recover a mere 0.09% of their claims from proposed sale of three key Asia Aluminum companies to Golden Concord. This compared to the provisional liquidator’s estimated recovery of 20.5% for holders of Asia Aluminum Holdings’ USD 450m bonds. However, as reported, Ferrier Hodgson in a 26 May conference call with bondholders, stated it had revised its estimate and that the recovery to PIK noteholders might increase to 1% of par, while the estimated recovery for bondholders was revised to just below 20%.

Thus, some observers of the situation believe the PIK noteholders’ attempts to seize control of the Asia Aluminum group from the provisional liquidator is an attempt to delay a resolution of the situation, since this would allow the deeply subordinated noteholders to avoid crystallizing losses on their PIK notes. If some of these PIK noteholders have not fully provisioned for the losses that they would suffer if the provisional liquidator’s plans proceeded, then these investors would have an incentive to delay or disrupt the proposed sale of assets to Golden Concord, the observers said.

One or two of the PIK noteholders are believed to have at least USD 100m each in PIK claims, the observers noted. Amortising losses over a six-month to one-year period rather than taking the hit up front could be one strategy these investors could be considering in dealing with the AA Investments situation, the observers added.

Alternatively, the PIK noteholders’ decision to file their motion to have the Asia Aluminum companies exited from provisional liquidation could be a strategy of mutually-assured- destruction, said the observers. The cancellation or a significant delay in the proposed sale of the Asia Aluminum companies to Golden Concord means bondholders might end up with no recoveries at all, they noted, Thus, by filing the motion the PIK noteholders to Golden Concord, the PIK holders might be aiming to negotiate a deal in which senior creditors would allow for the PIKs to recover more from the sale of assets to Golden Concord than has already been suggested by the provisional liquidator, the sources said.

While Ferrier Hodgson’s estimates for the recoveries to bondholders has been in the 20% region, the provisional liquidator had also warned in its 26 May conference call that bondholders recoveries’ could be “zero” if the sale to Golden Concord or another bidder did not occur soon, and/or if bondholders did not support the sale of the assets, the sources noted.

Despite the Asia Aluminum group’s default, Chinese banks that are secured creditors to aluminum extruder’s onshore companies and trade creditors, which together are owed a total of HKD 2.653bn (USD 343m), have stayed their claims, the sources noted. The Chinese banks have additionally continued to provide working capital, the sources noted. However, this support would most probably be withdrawn if an investor attempted to take over the group without the support of the Chinese banks and officials in Zhaoqing, Guangdong Province, where the Asia Aluminum Industrial City is located, the sources said.

As reported, in its 26 May conference call, Ferrier Hodgson stated that Chinese banks would likely respond to a hostile takeover of the Asia Aluminum group by freezing the companies’ assets. Asia Aluminum group’s onshore assets would then be auctioned by Chinese courts and the proceeds used to repay the Chinese banks, Ferrier Hodgson said, according to the sources who participated in the conference call. It is likely that there would be no funds available from these Chinese court asset sales to repay the bondholders and so the recovery on the USD 450m bonds would be nil, the provisional liquidator stated in the conference call, the sources said.

In its email sent to the bondholders late Wednesday Ferrier Hodgson, re-iterated its belief that that attempts by investors to take control of the company without the support of local government and Chinese banks would backfire and destroy value, the bondholders said.

Thus, ahead of the 8 June hearing regarding the PIK noteholders motion, Ferrier Hodgson urged, in its email sent Wednesday night, that bondholders submit documents stating their support for the provisional liquidator’s plan to sell three of the Asia Aluminum companies to Golden Concord, the bondholders said.

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