Chinese Company Restructuring Draws Big Funds

Here’s a dramatic instance of distressed debt investing on a global stage. Chemical maker ShengdaTech Inc. is not just financially distressed; it has deeper problems. Earlier this year shareholders sued it for issuing false statements. The shares went down steeply and Nasdaq delisted the company. While all this happened the board was apparently unable to function or even meet.

ShengdaTech filed for Chapter 11 bankruptcy in August. A special committee found that financial records may have been falsified in whole or in part and sales were possibly overstated by a lot.

Now AQR and Angelo Gordon & Co. have bought ShengdaTech convertible notes.  Angelo Gordon is known for a strategy that seeks opportunity in Chapter 11 reorganizations, where the legal issues can be as important as the fundamentals of the business. AQR manages a wide range of strategies in hedge and, increasingly, mutual funds.

ShengdaTech describes itself as an innovative Chinese company that makes nano-precipitated calcium carbonate.  The board and executive suite are undergoing change, to put it mildly. Xiangzhi Chen, chief executive and owner of more than 5% of voting shares, was removed. Goldman Sachs is the other large stockholder with 7.6%.

Presumably all the bad news is already out and the new creditors have a realistic idea of the prospects for relisting the shares on an exchange or selling to a strategic buyer. Angelo Gordon and AQR can convert the notes to stock at any time. Meanwhile they get yield. Not a bad deal.

Of course, there is risk. Their analysts must have looked carefully underneath the ShengdaTech accounting. One can’t help but recall John Paulson’s Sino-Forest debacle, though there the fraud came as a surprise after Mr. Paulson bought Sino-Forest and he owned stock, not relatively protected bonds.

By contrast Angelo Gordon and AQR knew of the numbers game before they agreed to take on ShengdaTech debt.

There is the question of how well ShengdaTech’s pre-bankruptcy creditors will do in the reorganization. These included Lazard, Zazove Associates, Citadel Group, Deutsche Bank, Radcliffe Capital, Advent Capital and CNH Partners. Lazard was reportedly trying to get its money back when ShengdaTech filed for bankruptcy, probably as protection against Lazard and other creditors.

Some bondholders caught up in the bankruptcy may sell their interest.

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Tags: Angelo Gordon & Co., AQR, Citadel Group, CNH Partners, Deutsche Bank, Goldman Sachs, John Paulson, Lazard, Sino-Forest