HSBC has recently filed a winding up application on China Fishery
to the High Court of Hong Kong. It pertains to china Fishery’s (CF) difficulty
in servicing its debts. From China Fishery’s AR 2014, it can be seen that China
Fishery had US $303 Mil of debts which needs to be settled within this FY and
it has paid US $131 Mil thus far. Similarly, in the financial year before, CF
had a US $505 Million debt but was successfully rolled over.
Chna Fishery's Debt Profile |
The trouble it seems is that one of its 5 lenders, HSBC, is refusing
to continue to roll over its debts. One problem with CF is its inability to
have a quick cash conversion cycle. It takes a while to convert its inventories to receivable
and then to cash. With just one of its 5 lenders no longer allowing the rolling of debt game,
CF is experiencing cash flow problems.
It comes to show how important cash flow management is
because banks are free to “take the umbrella away” anytime and leave you in
cash flow trouble. Ironically on a full FY basis, CF is able to produce
approximately US $165 mil of cash before working capital changes. With about
$18 mil in bank expenses, $35 Mil bond payments and income taxes, the company is able to generate about US$112 mil. In addition, from now to 28 March 2016, CF will receive US $61 million in inventory/cash from its supplier. Hence it seems had HSBC allowed another rolling over, it is likely CF will be able to partially pay off its
debts.
Takeaway
When analyzing a company, It will be good to see the debt profile. Given the current economic slowdown, it seems banks are now not hesitant to take away the proverbial "umbrella". This will be precarious for companies who are debt laden and rely on the rolling over of debts to support their operations. For CF's case, only one of its five lenders had decided not to play ball, and CF is now in trouble.