Guangdong Zhenrong and Warburg Pincus in Dispute

Wednesday, 1 May 2013, 18:00 HKT/SGT

Zhenrong's bid to save Titan Petrochemicals still in hot water

HONG KONG, May 1, 2013 - (ACN Newswire) - Titan Petrochemicals (1192.HK, "Titan") is navigating a rocky road in its attempt to resume trading. Although Guangdong Zhenrong Energy Co., Ltd. ("Guangdong Zhenrong"), the white knight, has injected USD 450 million into an escrow account, the transaction is still hanging in the air. Sources close to the senior management of Titan suspect there is another buyer behind the scene motivating the private equity fund Warburg Pincus, a creditor and shareholder of Titan, to insist on pursing a liquidation petition for Titan, despite the risk of defaulting its USD 49 million debt and suffering possible consequences of contract default.

Nevertheless, sources close to Warburg Pincus and Southernpec have denied the above speculation. Sources say the transaction has not been completed up till now because certain contractual conditions have not been met. "Guangdong Zhenrong, a state-owned enterprise, has to fulfill certain identification processes to meet the legal requirements of this acquisition, but the process is not completed. On top of this, Guangdong Zhenrong has not complied with the payment schedule," a source claimed.

On the contrary, a source close to the deal said Zhenrong had met the deal requirements long ago. The source revealed that necessary approvals were obtained within the time specified in the contract, and that Zhenrong had paid the full contract amount. The allegation that the process had not been completed or that contract terms were not complied with was not factual.

In 2007, Titan Petrochemicals introduced Warburg Pincus as an investor through the issue of notes in Titan and in China StorageCo, the vehicle through which Titan held on-shore storage terminal operations in the PRC. Warburg Pincus then held a 49.9% shareholding in StorageCo. In July 2009, Warburg Pincus further subscribed for HK$156 million-worth of notes of StorageCo. Further, in May 2012, when Titan was unable to redeem the senior notes then due, Warburg Pincus' Saturn Storage Limited ("SSL"), option holder of StorageCo, exercised the options, thereby increasing its holding in preferred shares to 50.1%. In June of the same year, Warburg Pincus, as creditor and shareholder, took over StorageCo and filed a liquidation petition for the storage business.

Guangdong Zhenrong stepped in as a white knight at this time. In July 2012, Guangdong Zhenrong announced its intention to save Titan and repurchase the storage assets from the liquidator. According to materials obtained by the reporter, Guangdong Zhenrong, Warburg Pincus and Southernpec reached an agreement under which Warburg Pincus and Southernpec would first obtain the storage assets from the liquidator and then sell them to Guangdong Zhenrong. In October 2012, the parties entered into another agreement under which Warburg Pincus and Southernpec agreed to sell the storage assets to Guangdong Zhenrong at a consideration of USD 325 million, and the preferred shares were to be sold to Guangdong Zhenrong at USD 25 million. Subsequently, Guangdong Zhenrong deposited the relevant amount into the designated escrow account.

A source told the "Economic Information Daily" that if this agreement was executed, it would be a "happy ending" for all parties. Guangdong Zhenrong would have acquired the storage assets and become a public company through a backdoor listing. Warburg Pincus would have made a profit as the price of USD 350 million offered by Guangdong Zhenrong was USD 60 million higher than the cost of obtaining the assets from the liquidator. To creditors and shareholders the resumption of trading would also be good news.

"All conditions have been met, but Warburg Pincus unilaterally delayed and did not complete the transaction," a source close to the senior management of Titan said. "The USD 350 million and another USD 100 million that Guangdong Zhenrong deposited to the escrow account have been sitting there, but Warburg Pincus did not proceed nor default the deal. Therefore, in January 2013, Guangdong Zhenrong applied for arbitration to force Warburg Pincus to execute the contract. In February, Warburg Pincus restarted the liquidation petition four months after its original attempt to liquidate Titan."

The source said as Titan was in financial difficulty, Warburg Pincus' USD 49 million notes would be at risk if Titan was liquidated. They implied that Warburg Pincus would not only be giving up a profit of USD 60 million at its fingertips but it would also bear the default risk of its USD 49-million-worth of notes. The source suspected that there were greater hidden benefits behind this 180-degree change in attitude of Warburg Pincus. "Southernpec may be particularly interested in the storage assets, but it does not have the financial strength to offer a better price. A more likely scenario would probably be that Southernpec is just a shield, behind it there may be another buyer willing to pay a higher price to acquire the storage assets," the source said.

Warburg Pincus and Southernpec set up the joint-venture company Neptune to be responsible for the operation of the storage company's assets. Southernpec is in a controlling position. Sources close to Warburg Pincus and Southernpec said that Neptune's major task now was to ensure the effective operation of the storage assets. The reason for restarting the liquidation petition of Titan had come from the desire to protect the assets. "Even after liquidation, the independence and integrity of the storage company's assets would not be affected. It does not preclude the transaction," the source said. The source did not rule out the continual execution of Zhenrong's storage asset acquisition upon fulfillment of all contract terms.

The storage assets mainly consist of four ports in Fujian, Yantai, and other cities in mainland China. These are strategic storage assets that include land-use rights, and are used for the storage of hazardous substances (petroleum and related products, etc.). Total asset value is approximately USD 250 million to USD 280 million. A point worth highlighting is that if the transaction goes as per the agreement signed, Warburg Pincus would no longer be a creditor of Titan and therefore it would not be qualified to present a liquidation petition. Titan is now going through legal proceedings to apply to a Bermuda court to revoke the liquidation petition. It will be Titan's first step in a bid to resume trading within this year.

Source: Economic Information Daily

Topic: Legal Action Sectors: Gas & Oil, Energy, Alternatives
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