Thursday, January 24, 2013

China Insolvency Case Study: ShengdaTech

ShengdaTech Inc was a maker of nano precipitated calcium carbonate for the tire industry that filed for bankruptcy protection on August 19, 2011.

There were two series of notes owed less than $200 million. Although the Company was headquartered in China and derived a majority of its revenues from sales to other China-based customers, the filing was in U.S. Bankruptcy Court, District of Nevada.

According to a class action securities complaint [pdf], the company had made reports to the Chinese Administration of Industry and Commerce (AIC, which is the business regulatory agency in China) that differed significantly (lower) from what it was reporting in SEC filings.

For example, for the period ending December 31, 2008, it "reported $82.4 million in NPCC net sales and $36.03 million in net income to the SEC in its 10-K, but reported only $9.5 million in net sales and an approximately $2 million net loss to the AIC. For the period ending December 31, 2009, the Company reported net sales of $102.1 million and net income of $23.1 million as compared to net income of $6.07 million and a net loss of $6.2 million with the AIC."

Then, on March 3, 2011, the company's auditor gave it notice that it would not be able to complete its audit for the 2010 fiscal year until "certain discrepancies and issues were resolved." On March 15, 2011, the company issued a press release announcing that it had appointed a special committee to investigate "potentially serious discrepancies and unexplained issues relating to the Company and its subsidiaries' financial records identified by the Company's auditors".

The complaint explains, "in response to these announcements, trading in ShengdaTech common stock was suspended. At the time of the trading suspension, ShengdaTech common stock traded at $3.55 per share. On June 10, 2011, trading in ShengdaTech common stock resumed and the price of ShengdaTech common stock declined to $0.25 per share, a decline of over 90% from its last close. 12. On August 19, 2011, ShengdaTech filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code."

You can see the decline in the stock chart. It's worth noting that the stock was halted for almost three months after the company issued the press release. That seems to be somewhat common length of time for halts. It's also worth noting that the common stock was immediately obliterated once the common stock resumed trading - even though the bankruptcy filing took place over two months later.

Also interesting: on June 17, 2011 the stock price had fallen to 13 cents. Then it rallied to a high of 47 cents on June 24 and lingered around that level until the bankruptcy filing when it fell to 5 cents. Worthless stock inefficiency!


Allan Folz said...

Have you ever held puts on a halted stock? Do you know what happens? This is one of those areas with lots of rumors and conjecture, but I've never heard from someone with first-hand experience.

CP said...

You are allowed (by the OCC) to exercise and go short. How your broker will handle it is a different matter.

It's a lot easier if nothing gets halted.

Jason said...

FYI - Your broker will keep the cost of borrow rolling while it is halted if you are short. They may also charge the rate on a $5 price if the stock trades below there - a "true up". You can lose (a lot) of money if the cost of borrow is terribly high.

May actually be worthless and efficient...

Allan Folz said...

Interesting, do they still have to do a locate first? What if stock can't be located? For that matter does a stock halt apply to the options?

The STP bond is due Mar 15? The Mar options also expire the 15th. Would brokerages (ie. traditionally the options writers) keep it trading until the forced default on the 18th?

CP said...

It's a default if the bond isn't repaid on Mar 15. Also, options technically don't expire on Friday as many people think, but the weekend of options expiration.

I'd imagine that if there is no plan ($ from China to repay the bonds) by Mar 15, then they will file BK that day or at least there will be a fair amount of media attention to the fact that the company is in default.