Shanghai-based DongHao Oil Group announced yesterday it entered a debt reconstruction agreement that it hopes will be its first step toward exiting a financial crisis and resuming lubricant production.
DongHao posted a message on its official WeChat platform Monday stating that it reached an agreement with Shanghai Leadbank Asset Management that will provide working capital and establish a platform for further financial restructuring. The two parties set up a working group of seven financial and business officers, led by DongHao founder and Chief Executive Officer Min Chunguang and Leadbank President Xia Jianpei.
The company previously posted a message on its website saying it was seeking additional investors to restructure its debt, and local newswire Shanghai Business reported Min acknowledging that the company faced liabilities of RMB 1.2 billion (U.S. $196 million).
The company stopped producing lubricants on Sept. 5.
On its website, DongHao posted a Shanghai Business article quoting Min saying that the companys banks stopped giving it new loans and called for early repayment of existing ones. Min said this forced the company to seek loans from other sources that charged 10 times higher interest rates.
Gong Wei, a lubricant industry analyst with Sublime China Information Group, said DongHao was hurt by lending practice changes made in the wake of a slowdown in Chinas economic growth. The pace of growth in the nations lubricant demand has declined, she said, because key end-user industries are not expanding as fast as in previous years.
These reductions result in less demand for industrial lubricants, and the whole lubricant industry in China already has excess production capacity, Gong noted.
The Chinese government called for some form of corrective macroeconomic action, and Chinese banks are tightening business lending rules to avoid risks, Gong said, adding that this broke DongHaos capital chain.
Gong noted that DongHao is not the only one affected. Jiangsu Hengshunda Bio-energy, a manufacturer of bio-diesel and lubricants, also stopped production due to a fractured capital chain in June of this year, after banks rejected more business loans. Hengshunda had a collaborative project with Sinopec on biodiesel.
Shanghai Zhongran Petroleum Chemical Industry Co. went bankrupt in May, with debt of nearly RMB 500 million. Shandong Tianhong New Energy and Shanghai Fuel Co. are also having problems with capital turnover and liquidity, which led to production shutdowns and internal reorganization.
According to DongHaos announcement, the company expects to restart seven production lines over the next few weeks after external funds are put in place. The company plans to produce 1,200 tons lubricants in 15 days. Meanwhile, its CEO is still pursuing talks for supplementary funding from a number of potential strategic investors.
Gong said DongHao is likely to receive government support in escaping its crisis because it is a large domestic enterprise and a national brand that offers employment opportunities and other benefits to local development.
Founded in 2003, DongHaos registered capital reached RMB 200 million in January 2013, with a turnover approaching RMB 4.5 billion. In addition to its lube manufacturing operations, the group owns a chain of more than 20 stores for automotive repair and maintenance services in Shanghai.
In 2012, DongHao established an export trading company that has shipped lubricants to South America, Africa and Sweden.