Two large hedge funds that purchased a sizable portion of the outstanding debt owed by China Fishery Group (CFG) are among those pushing for a creditor-led takeover of the bankrupt Peruvian fishmeal and fish oil producer due to dissatisfaction with the ongoing sale process.
The US funds — Davidson Kempner Capital Management and Monarch Alternative Capital — are leaders among a group of seven senior creditors known as the ‘ad hoc group’ (AHG) that are proposing an alternative resolution to the five-year-old bankruptcy case.
Instead of selling off CFG to a seafood company or investment fund as trustee William Brandt has long proposed, the ad hoc group’s debt-for-equity swap plan would see senior creditors lead CFG out of bankruptcy, operate it for an undetermined period and only then prepare for its eventual transfer in a sale or initial public offering process, sources told Undercurrent News.
Brandt “has been trying to sell the business for going on four years and hasn’t been successful to date. There’s a limit to people’s patience”, a source familiar with the AHG plan told Undercurrent.
CFG is widely seen as the most profitable asset of Hong Kong’s Pacific Andes International Holdings (PAIH), once the world’s 12th-largest seafood company by sales. In late 2016, several large banks that had lent to PAIH and CFG told a US bankruptcy court that they had found over $1 billion in “questionable transactions” and “substantial” fabrications of revenue and payments on the company’s books.
Citing the alleged fraud and a lack of trust in the group’s management by the Hong Kong-based Ng family who had grown PAIH into a seafood powerhouse over decades, the banks wanted a trustee named to operate and manage a sale of the group’s main asset, CFG. New York bankruptcy judge
James Garrity appointed Brandt as trustee in November 2016. The Ngs have roundly denied the fraud allegations.
But five years after Brandt’s appointment, some creditors have a “lack of confidence” in the trustee’s ability to close a sale of CFG, which he has said will likely occur by the end of 2021, the source familiar with the AHG plan told Undercurrent. That has influenced creditors’ motives to advance their own plan.
The source said that as long as CFG remains a party to bankruptcy, the fishmeal maker, Peru’s largest anchovy quota holder, is limited from reaching its full potential. In addition, millions are being paid out annually to lawyers, consultants, and others as part of the bankruptcy process, the source added.
Ignacio Kleiman, a veteran seafood sector mergers and acquisitions advisor who is unaffiliated with CFG and the AHG plan, told Undercurrent that he sees the logic in the AHG’s efforts.
“Given the complexity of the situation and the recovery in value due to better operational and financial performance of the company, it would make sense for the creditors to take over the company (just like it happened with Pescanova in Spain back in the day),” Kleiman told Undercurrent.
Following the 2013 fraud-provoked bankruptcy of Spanish fishing and aquaculture conglomerate Pescanova, a coalition of its biggest lenders took control and engineered a turnaround at the company.
AHG’s creditor-led plan would see $750 million of existing CFG debt converted to equity and $150m in new money injected into the business to recapitalize the company, improve its liquidity and pay off bankruptcy-related expenses.
The proposal has the support of “in excess” of 56% of holders of the fishmeal maker’s senior notes and 71% of its “club loans”, the ad hoc group said in a press release. Prior to bankruptcy, CFG borrowed $650m in club loans from a syndicate of banks that included HSBC, Rabobank and others. Additionally, in 2012, the company issued $200m in senior notes.
Following the 2016 bankruptcy, many of the club loan debt claims were sold off in secondary markets to investors that included hedge funds and private equity firms that specialize in restructuring deals, sources told Undercurrent.
The AHG is currently gathering support from other CFG creditors. It has said that senior debt holders who sign on to their plan by March 16, 2021, will be entitled to receive a pro-rata share of approximately $22m in cash if the deal closes. Debt holders that fail to sign up by that date will share in a pool of $11m, AHG said.
After a successful exit from bankruptcy, which could occur in the second half of 2021, oversight of CFG would transfer from Brandt, the trustee, to a yet-to-be-appointed board of directors, the source familiar with the AHG plan said. Proponents of the plan are thought to have the “utmost” confidence in CFG’s current Peruvian-based management team, which is led by CEO Jose Miguel Tirado.
Then, the creditors could operate CFG for a yet-to-be-determined time period. Any exit could take the form of an initial public offering or sale to a seafood sector or other investor, sources told Undercurrent.
“It’s patient capital and there’s no real date certain that the business needs to be sold,” the source familiar with AHG’s thinking said.
Can AHG’s plan succeed?
However, Brandt, the CFG trustee, told Undercurrent that he has doubts that the AHG plan will be able to be approved as its stands. In addition to securing support from a majority of creditors in the New York bankruptcy court, the AHG members need creditors’ support in “schemes of arrangement” processes in the UK and Singapore, Brandt said. Hold-out creditors in those jurisdictions that aren’t members of AHG aren’t yet on board with the plan, Brandt said.
An analytical article, published in the restructuring-focused news service Debtwire on March 4 said that the hold-outs from the AHG plan include CFG lender HSBC.
The Debtwire article cited another obstacle that the AHG plan would have to overcome. First, because CFG is a Singaporean-registered entity, ultimately its shareholders, the Ng family, need to consent to the sale under Singaporean law. The Ngs have distanced themselves from the AHG plan but haven’t said if they support it.
Brandt feels that he is in a better position than the AHG to resolve the remaining disputes.
“Eventually we’re going to have to deal with Ngs and we’re going to have to deal with HSBC and I’m talking to all of those people constantly in negotiations. They’re not,” the trustee said of AHG.
The advance of the AHG plan comes as Brandt has seen recent success largely resolving a series of what he’s referred to as “gating issues”, legal and administrative impediments holding up a sale process.
These include the completion of a backlog of audits of CFG and its subsidiaries; procuring tax certificates from Peruvian authorities that give certainty to a CFG buyer about the company’s tax liability; and resolving $475m in outstanding “inter-company” claims between CFG and other PAIH subsidiaries. A fourth issue, a settlement between CFG and a series of PAIH affiliates under liquidation by the firm FTI Consulting, was reached last month for the sum of $12m but still requires court approval in New York.
“I think there has been — I don’t want to overstate it — somewhat of a frenzy of activity recently when everybody could smell in the wind that the FTI deal was about to go away for a nominal sum of money in the scheme of things,” Brandt said. “That has picked up the process.”
The fifth and final ‘gating’ issue is one of ‘consents’ from several CFG affiliates and third parties needed to sell the company, Brandt said.
Undercurrent previously reported that interested parties for CFG included a mix of seafood sector players, private equity firms, and sovereign wealth funds. Parties involved in a separate aborted 2015 sale process for the company included Iceland’s Samherji and the Netherlands-based Parlevliet and Van der Plas, two fishing rms that were interested in making a joint bid; Peru’s Group Brescia, which owns Tecnologica de Alimentos, known as TASA; and the Dyer Coriat family, the owners of Peruvian shrimp and agribusiness group Camposol.
Brandt said in July 2020 that several Chinese firms in fishmeal and fish oil-related businesses had also expressed interest. He said in an interview last month that he sees a number of large companies trying to put together deals — “although none with the ardor of the Asians, I would say”.
He said he believes between the creditor-led plan and the emerging sale process that CFG will change hands by the end of 2021.
“I think between the creditor plan and the others, we’re moving quickly toward a creditor plan this year. I actually think more like Sept. 30 is even possible. I think the outlines of where this will go and who will buy it will be known in the next 120 to 180 days. And we’ll figure out the best deal and do it,” he said.
The trustee added that his mandate is to maximize the value of the assets under his care for creditors.
From that perspective, it doesn’t matter whether the CFG process is resolved in a creditor-led debt for equity swap, he said. The proposal, if it materializes in a plan before the court, could be useful as a “stalking horse” offer, which could then be matched or surpassed by other bidders, Brandt said.
He added that while he would have liked to have sold CFG by now, a myriad of issues have prevented him from doing so.
‘It’s a horribly complex case with a great deal of other issues to deal with and I’m doing the best I can,” he said.