Thursday, 25 February 2010

More clarity needed for SGX policy on firms at risk of delisting

Why is it that shareholders’ hopes of recovering their investments in China Printing & Dyeing and FerroChina should be dashed when a restructuring deal looks so close to being sealed?


Guanyu 道 said...

More clarity needed for SGX policy on firms at risk of delisting

24 February 2010

Why is it that shareholders’ hopes of recovering their investments in China Printing & Dyeing and FerroChina should be dashed when a restructuring deal looks so close to being sealed?

It seems no one will be the wiser, simply because the Singapore Exchange (SGX) has decided not to go public on its decision against granting both companies an extension of time to submit their proposals on a viable plan to resume trading of their shares.

After the SGX refused to extend the deadline and rejected China Printing’s appeal, the Exchange acceded to the company’s request to delist without an exit offer. One week earlier, SGX also declined a similar appeal from FerroChina, which also wanted to undertake a reverse takeover (RTO).

According to SGX listing rules, companies which have suspended trading of their shares need to submit a trading resumption proposal within 12 months of suspension or face delisting. To delist, such companies are required to provide a cash exit offer to shareholders or other reasonable alternatives. Unfortunately, cashless, debt-ridden companies like China Printing cannot make a cash exit offer to delist. But since they are not given more time to restructure to resume trading, the only way is for SGX to waive the requirement of an exit offer - leaving investors with the prospect of losing all their money.

Now, SGX probably has strong reasons for letting that happen. To be fair, it has given China Printing a time extension before. And the fact that China Printing and other companies in the same predicament have failed to submit proposals to SGX in time underlines the difficulties they face in saving themselves and casts doubt on their prospects of being restructured or salvaged at all.

But without publicly explaining its position, the Exchange has left much room for speculation.

One conjecture is that SGX imposes a higher test for the relisting of troubled companies through injection of new businesses, compared to what it applies to an initial public offer, as it probably ‘doesn’t want the same company to fail twice’, as market players put it.

But since there is no material cost in keeping the shares of these companies suspended, shouldn’t they be afforded more time to restructure? At least shareholders still have a chance to recover some money.

In the case of China Printing, the SGX’s position also seems to be at odds with the stance taken by the Singapore High Court.

In October last year, the High Court granted an extension of the judicial management order for China Printing by a further 180 days until May 18, 2010. It also extended the deadline until March 31, 2010, for the judicial managers to send a statement of their proposals to the Registrar of Companies and all creditors.

A reasonable reading of this is that the Court has assessed the merits of the judicial managers’ plan and considered the proposed RTO to be potentially viable.

China Printing’s judicial managers also applied for a time extension from SGX, saying they needed more time from the Exchange to agree with the potential investor on the terms of a RTO and were in the process of finalising the term sheet. In their subsequent appeal against the Exchange’s refusal, they cited a letter from the potential investor on Dec 17, 2009, which indicated continued interest to undertake the RTO.

A similar story unfolded at FerroChina, which said that if the SGX accepted its appeal for more time, it would enter into a sale and purchase agreement with its RTO target no later than March 10, 2010.

But it was a ‘no’ from SGX in both cases, when there seemingly was light at the end of the tunnel. It is therefore in the interest of market clarity for the Exchange to explain why.

Guanyu 道 said...

It is also important to note that the trading suspension of these companies coincided with one of the worst recessions ever. This would have affected their search for RTO targets, as faltering bottom lines and a reduced pool of public investors may have hindered some from meeting SGX listing requirements.

SGX, however, appears prepared to be more accommodating towards companies on its watch-list of loss-making firms. This month, it granted a one-year extension to these companies to meet the requirements to exit from the watchlist ‘in view of the unusual and difficult market conditions of the last two years’.

Market watchers will draw a contrast between this, and the apparently tougher stance taken on distressed, suspended companies facing delisting.

With a slew of other distressed companies like Oriental Century, Zhonghui Holdings, Fibrechem, China Sun and Celestial Nutrifoods racing against time to work towards trading resumption, there is a risk that more delistings will take place without an exit offer this year, leaving investors out in the cold.

The position SGX takes in each case will be closely watched. After all, a delisting without an exit offer runs counter to its own push for companies to provide a reasonable exit offer when delisting.

The Exchange should also try to do more to articulate its position. Leaving shareholders and market watchers guessing runs the risk of being seen as acting in an arbitrary fashion, which surely is not the case.