Pacific Andes Resources Development Limited - Can it repay its bondholders?

Sunday, 14 February 2016 - Pacific Andes Regional Developments (PARD) subsidiary China Fisheries Group (CFG) has welcomed the formation of an informal committee of investors holding some of its US$300 mln 9.75% notes due July 30, 2019.

The Hong Kong-based firm representing them, Kirkland & Ellis, is in contact with a further twelve financial institutions which might join this committee in the future.

Together, they hold more than 40% of the principal amount of the notes.

CFG had missed a coupon payment of about US$14.6 mln on the notes.

CFG says it looks forward to "open and transparent dialogue with the Committee and their legal representatives and to participate in discussions with other long-term financial creditors".

Alleged breaches of bond covenants by CFG parent company Pacific Andes is having a big impact on the Singapore market.

PARD had informed its bondholders that it will not be able to pay interest on the S$200 mln 8.5% bonds due in 2017.

PARD and CFG have managed to win the legal proceedings against the joint liquidity providers from KPMG in Hong Kong and Cayman.

However, the company had to pay US$3.1 mln to KPMG, before February 10, to cover costs.

At the time of publication, PARD had not made any further comments about whether it had made this payment.

"This situation is opening a can of worms in Singapore," was a comment made by Mr Raymond Chia, head of credit research for Asia ex-Japan at Schroder Investment Management in Singapore, after PARD received a letter from bond trustee HSBC Holdings alleging breaches on the 2017 bonds.

In November 2015, HSBC filed an application in the High Court of Hong Kong to appoint liquidators for PARD's subsidiary China Fishery listed on the Singapore Exchange and China Fishery International.

But PARD wants to sell these assets on its own because it believes it can sell them at a higher price.

In August 2015, PARD and CFG announced that the Monetary Authority of Singapore and the Commercial Affairs Department had asked for certain documents dating back to 2011.

The company has established a committee comprising independent directors, but did not opt for any third party review, to investigate the reasons for these events.

When bond holders take action it means that the company is definitely having major problems because they have the first right to the company's assets. Equity shareholders usually come last.

Hong Kong-listed Pacific Andes International Holdings owns about 66% of SGX-listed PARD, which in turn controls about 70% of China Fishery Group.

The group has had its share of controversy.

In the early 2000s, the company was blamed for illegal toothfish fishing.

A decade later, the group's vessel Damanzaihao, the world's largest fishing vessel with 49,367 tons capacity, was declared a pirate ship by a Wellington-based international control agency.

It was also involved in allegations of over-reporting of catch figures by Peru and Russia in the South Pacific to secure larger future quotas.

However, the Group has always found a way out.

For example, as the toothfish scandal hit it moved more into Russian pollock.

Question

1. Can Pacific Andes and China Fishery repay its bondholders?

Both subsidiaries of Pacific Andes International Holdings (PAIH) told bondholders they won't be able to make interest payments.

PARD justified that preservation of cash for use in the business was the highest priority at this time given existing cash constraints.

Standard & Poor's downgraded China Fishery after the company missed the coupon payment on the US$300 mln senior unsecured notes due 2019 that China Fishery guarantees.

The coupon payment of about US$14.6 mln was due on January 30.

It does not expect China Fishery to make the payment within the 30-day grace period, given that the company may need to reserve all available cash to fund its fishing operations in Peru.

It also does not believe the company will pay its other debt obligations, given its tight liquidity position.

All of China Fishery's banking facilities are at standstill, and it has no additional liquidity support.

However, Fitch Ratings says that China Fishery's failure to pay a coupon on 30 January 2016 does not immediately trigger a downgrade to 'RD' as the company has a 30-day grace period to make the payment, under the terms of the notes.

Hence, its rating remains at 'C'.

Therefore, it makes us wonder whether it can make coupon payment anytime soon, and indeed repay the bond principal?

Question

2. When will it release its FY15 results, which is long overdue?

PARD and CFG are yet to publish its fiscal 2015 ended September 28 and Q1 FY16 results.

It had applied to the Singapore Exchange to grant an extension of time.

The rationale for the second extension till February 28 is the matters relating to the liquidation of China Fishery and China Fishery International as they are in a state of flux.

This causes uncertainty in the basis of assessment of carrying amount of certain assets and liabilities, it said.

S&P expect China Fishery's operating performance to continue to deteriorate over the next 12 months.

It anticipates that revenue for FY15 may have dropped by 30% to 35% YoY given the adverse weather conditions that have affected fishing catches in Peru, significantly reduced sales from the fish supply business in Russia, and still-weak operations in Namibia.

It also expects revenue growth in fiscal 2016 to remain flat, given the impact of El Nino on the 2015 'Season B' and possible delays in fishing activities, given the company's liquidity distress.

On November 10, Moody's highlighted that the Peruvian government had announced a much smaller allowed total catch for anchovy.

It was only going to be 1.1 metric tons for the November-January fishing session, which is less than half of the 2.58 metric tons allowed for the April-July season.

Consequently, it expected China Fishery's revenue would fall below US$300 mln in 2016, from US$488 mln for the 12 months.

Its EBITDA would drop to US$100 mln - US$110 mln from US$240 mln over the same period.

The company reported cash of US$41 mln and inventory of US$235 mln as of 30 June 2015.

In addition, it expects to collect US$80 mln cash repatriation from its Russian suppliers in the next 12 months.

However, these cash sources are insufficient to cover the company's operating and debt servicing expenses over the next 12 months, it said.

Analysis by Investor Central on PARD's and China Fishery's financial statements reveals that 50% of China Fishery's assets on the balance sheet are intangibles, which includes goodwill and fishing permits in Peru after it acquired Copeinca in August 2013.

Moreover, accounts receivables outstanding more than 90 days has increased 186% YoY in 2013 and 199% in 2014.

China Fishery's inventories have also increased by more than 50% since 2013 indicating cash blocked in this current asset.

Moreover, its revenue growth reflects huge volatility with an average growth of 20% for 2011-2014.

However, PARD's revenue has been declining for the last three fiscal years.

PARD's cash declined by 72% and China Fishery's by 68% in nine months.

Given below is the snapshot of both the companies' financials.

(Click the image to enlarge.)

(Read the full story to get all 7 important questions)

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this report if we do.

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