Chinese CAT-Equivalent, Sany, Finds Itself In Liquidity Crunch, Seeks Covenant Waiver

Over two weeks ago we first described what at that point was merely the hint of trouble at Australian mega-miner Fortescue which is slowly but surely losing the fight with insolvency courtesy of plunging iron ore prices, whereby it was once again proven that bonds always have a better grasp of the situation than equities. Sure enough the cash crunch which we predicted was imminent at Fortescue, has since hit the company over the past several days, as the firm is currently in dire liquidity straits, desperate to renegotiate covenants and get waivers that allow it to continue operations even as creditors get the short stick (in exchange for some serious money upfront). It is unknown whether it will succeed, although judging by its halt from trading until next week by which point it hopes to restructure its debt, things are certainly not rosy for the megalevered iron-ore company. In retrospect, FMG AU is lucky to be alive as is, having had a comparable near-death experience back in 2007/2008: should its bondholders end up owning the equity, so be it. However, another far more troubling and certainly underpriced covenant renegotiation has struck, this time impacting Chinese conglomerate Sany Heavy Industry, a company which is the Chinese equivalent of US Caterpillar and Japanese Komatsu, which is owned by Liang Wengen who is mainland China's richest man with a $10 billion net worth, and which is so big and diversified that under no circumstances should it be forced to request covenant waivers, especially not under a soft-landing scenario for China. And yet this is precisely what it did.

From Reuters:

Sany Heavy Industry Co Ltd, a major heavy machinery maker controlled by one of China's richest men, is asking its lenders to waive a financial covenant on $510 million of loans, Basis Point reported, highlighting the growing risks facing the industry in an economic downturn.

Why is this mega-corporation, which has RMB 50 billion in income in a good year, has a $12 billion market cap, and 70,000 employees, suddenly in liquidity crisis?

Unpaid bills owed to companies in China's coal, steel and heavy machinery sectors jumped by a fifth in the six months to June as growth in the world's second-largest economy slowed, reducing manufacturing, and demand for a range of commodities.


Sany, which competes with Caterpillar Inc and Japan's Komatsu Ltd and which this year bought privately-owned German concrete pump maker Putzmeister for an estimated 360 million euros ($464.6 million), has $160 million in onshore loans and $350 million in offshore loans, according to Thomson Reuters data.

Which covenant is being breached:

The company, controlled by Liang Wengen - who is worth $8.1 billion, according to Forbes - is asking its lenders to waive the net debt to tangible net worth covenant - one of the terms of its loans - and to respond by the end of next week, Thomson Reuters publication Basis Point reported, citing sources. It did not name the lenders.


According to sources, the current requirement on net debt to tangible net assets is at less than 0.8 times, Basis Point reported.

And the punchline:

Its loans receivable - amounts creditors expect to be repaid at a specific date - more than doubled to almost 23 billion yuan ($3.63 billion) at end-June from six months earlier.

In other words the company which competes with Caterpillar (which already warned about some truly scary global trends) not only has a major debt problem, not only suddenly can not collect what is owed to it by various trade partners (which is the real red flag here), but also is suddenly facing collapsing profits: "The shares fell to more than 2-year lows late last month after Sany posted a 28 percent drop in second-quarter net profit - its biggest quarterly fall since 2008."

And that, ignoring the propaganda for a second, is what is really going on in the Chinese economy: a gradual and encroaching halt, in which vertical trade linkages are collapsing as there is simply not enough loan growth and liquidity (either localized or global) to keep the run-rate in place.

Hopefully the Fed and ECB can print enough "wealth" to somehow bail China out soon, because any hopes of the contrary are now forever dashed.

In other news: one gently used Cat 797F for sale, some minor dings. Great fuel efficiency.$5,000,000 OBO