21st Century Business Herald reporter Zhang Weize reported from Hong Kong
China's leading private higher education company, Xijiao International (formerly Hope Education), is facing the risk of liquidation a few days ago, and on April 14, the incident made new progress.
In its announcement of 14 April, Greek International responded to the winding-up petition. The announcement pointed out that there is no material adverse impact on the financial condition and operations of HEEC, and the management is committed to ensuring that the school continues to operate. The cash and cash equivalents held by HEEC as at 31 August 2023 are operating funds for the sole purpose of the schools and are subject to regulations and restrictions that such funds may only be used for the operation of the schools.
The announcement also pointed out that HEEC International has hired a professional financial adviser to evaluate the company's financial performance and assist the petitioner in carrying out measures. At the same time, the Company has formulated a preliminary plan for the repayment of the relevant bonds, including but not limited to seeking potential investors to participate in raising funds to obtain working capital for repayment or refinancing of the relevant bonds, identifying potential investors as the petitioners for refinancing the relevant bonds, and liaising with the petitioners on the debt restructuring plan, including amending the terms of the bonds such as maturity and coupon rate.
However, in response to the exclusive inquiry of the 21st Century Business Herald reporter on April 15, the special group of bondholders said, "Since March 14, the company has not directly or indirectly communicated with the holder group. The group of holders will consider further responses to the announcement on 14 April".
On March 27, a special group of bondholders holding a 49.1% interest in the offshore convertible bonds guaranteed by the Company instructed the trustee of the convertible bonds, The Bank of New York Mellon, London Branch, to file a winding-up petition with the Hong Kong court for the failure of the Company to repay a US$324 million convertible bond. The Hong Kong Court will hold its first hearing on the winding-up petition on 19 June 2024.
Through the announcement of the Hong Kong Stock Exchange and the information provided by the creditor group, the reporter made a timetable of what happened before and after the default of Greek International, so as to understand the current situation more intuitively.
Three major doubts
Throughout the event of a convertible bond default, a series of unusual circumstances occurred that raised numerous questions.
The first is that Wang Huiwu, as the actual controller of Xijiao International, continued to increase his holdings of Xijiao International shares from January 16 to March before the official default of the convertible bonds, increasing his holdings by a total of about 160 million shares, and his shareholding ratio increased to 20.61%, and it is estimated that his investment this time is about 48 million Hong Kong dollars.
Knowing that the news of the default will hit market confidence and cause the stock price to fall, why did they increase their holdings before the crash? A senior investor in Hong Kong stocks told reporters that this unusual increase in holdings may be due to the actual controller's efforts to stabilize market confidence, or it may be that he will absorb chips in advance and wait until the good news of repaying debts in the future is realized before selling the acquired shares to make a profit. However, he also said that there may be other reasons for the increase, which is difficult to judge unless there is substantial evidence.
On the other hand, some investors mentioned in the exchange forum of the stock that Wang Huiwu increased his stake in Xijiao International because his mortgage loan with a private bank was forced to sell because the stock fell to the liquidation line, which violated the concerted action agreement with Wang Degen and other actual controllers, so he bought it.
In addition to increasing their holdings before default, the aforementioned creditor groups also raised their doubts in the announcement. In January 2024, the company voluntarily repaid an offshore loan worth HK$620 million (US$80 million) to a syndicate of banks led by Standard Chartered Bank, 18 months earlier than the loan maturity date of June 2025, according to the creditors' group announcement.
Greeks confirmed that the funds came from China, but claimed that the relevant regulations had changed during this period, resulting in the company being unable to repay the convertible bonds through this route.
However, in response, the creditor group said that the special group of holders asked Greek Education International to provide details of its communication with onshore regulators and ministries to explain why the company could not use onshore cash to repay offshore convertible bonds. But the company was unable to provide this information, referring only to general policy documents, which were not intended to prevent the company from repaying its debts, as evidenced by the ability of other peers, such as China Education Group, to repay all of their offshore debts.
The fact that it is repaying its long-term debt early and "cold" its maturing debts is clearly contradicting the company's description of "financial difficulties". It inevitably makes creditors suspicious.
Several creditors of the creditor special group communicated with the 21st Century Business Herald reporter. One of the creditors (hereinafter referred to as a creditor in this communication) pointed out that some of the statements made by Wang Huiwu when he met with creditors on March 14 made him feel that Wang Huiwu had a "gambler" mentality. When Wang Huiwu discussed with creditors, he once said that "the liquidation lawsuit is not very big, there is no need to hire a lawyer, it is a waste of money"; I'm willing to gamble and lose" and other original words.
In its announcement, the special group of creditors also pointed out that the change in the management team before the company faced the risk of default was also confusing. On January 5, 2024, Xijiao International Group issued an announcement, saying that Chairman and Non-Executive Director He Shengli resigned and was replaced by Zhang Bing. Zhang Bing is Wang Degen's brother-in-law, and Wang Degen is the president of Huaxi Hope and one of the former directors and actual controllers of Xijiao International.
Creditors point out that they are not optimistic about the personnel changes of Greek International. He pointed out that the new chairman Zhang Bing lacked a management background in the field of education, while the former chairman He Shengli, a veteran of the higher education industry with rich experience in university management, resigned voluntarily after only two years in office, which is worrying.
On the other hand, the Special Group of Creditors pointed out that Huaxi Hope Group, the majority shareholder of Greek Education International, provided direct and indirect support for the company's onshore financing activities. The market generally classifies Hope Education as a "Hope Department" company. However, in February 2024, one month before the default of the convertible bonds, Hope Education Group changed its name to Hope Education International.
Creditors point out that, in their view, the name change and the change of leadership are the result of planning for default in advance, with the aim of severing it from its parent company, Huaxi Hope.
Recently, the reporter has contacted relevant people of Greek Education International many times, but has not received a reply.
What are the likelihoods of liquidation?
The Special Body of Creditors filed a winding-up petition on March 27 after serving a demand notice and a statutory recourse notice on Hellish International on 5 March.
Yu Binyuan, a practicing lawyer at Merits & Tree Law Firm's Hong Kong Associates, told the 21st Century Business Herald reporter that the submission of a winding-up petition by creditors does not necessarily lead to the issuance of a winding-up order, and there are still many procedures involved and variables during the period.
Yu Binyuan pointed out that the most common and straightforward way to file a winding-up petition with the Hong Kong court is to first issue a statutory demand to the company. Under Hong Kong law, a company's failure to pay a debt due of HK$10,000 or more may be regarded as "insolvency", and a creditor may file a winding-up petition with the court if the company remains unpaid or settles to the satisfaction of the creditor 21 days after the statutory demand has been served. The court will fix the time and place for hearing the petition, but there may be delays depending on factors such as whether the debtor has objected. Assuming that the court makes a winding-up order at its discretion, the court will appoint a liquidator who will then commence an investigation into the affairs of the company and manage and dispose of the company's assets. A similar situation is not uncommon in the debt crises encountered by real estate companies in recent years.
Yu Binyuan further stated that the true liquidation of the company may not be in the best interests of creditors. In similar cases, the winding-up petition is more often used as a form of pressure on creditors to force the company and creditors to reach a repayment arrangement, and there is still room for negotiation between creditors and the company. Even if the appointment of provisional liquidators is involved, there is still an opportunity for the company and its creditors to achieve a restructuring arrangement through a creditors' plan, for example.
Yu pointed out that after a winding-up petition is filed, many companies will reach a settlement agreement with creditors and withdraw the petition before the court issues a winding-up order. Taking Kangda Foods as an example, after receiving the winding-up petition on 20 October 2023, Kangda Foods negotiated with creditors and finally entered into a deed of repayment with the petitioner HK on 22 December 2023, which agreed to withdraw the petition and was granted by the High Court of Hong Kong at the hearing on 27 December 2023.
Yu Binyuan pointed out that although a listed company can still negotiate with creditors to repay its debts after creditors file a winding-up petition, the winding-up hearing will have a certain impact on the business reputation of the listed company and subsequent financing.
In communication with reporters, creditors also said that if Xijiao International launches a suitable debt restructuring plan, the two sides still have the possibility of continuing negotiations, but it depends on the company's attitude and the attractiveness of the relevant plan.
Meng Jiru, a partner in the distressed restructuring department of Merits & Tree Law Firm, told the 21st Century Business Herald reporter that although the current situation faced by the company is still far from the liquidation process, even if the company does enter the liquidation process, it may not necessarily need to close the mainland and overseas schools, and it is still possible to retain the continued operation of the school through certain transaction arrangements, such as considering the establishment of a new SPV (special purpose company), which will be divested as an asset to the new SPV and pay off the debts with the proceeds.
At the same time, he also pointed out that the laws of the Mainland clearly stipulate that school facilities shall not be used as security, so it is not highly likely that the school property will be included in the secured claim and then be repaid by the creditor in priority However, the Opinions clearly stipulate that the premise for applying for recognition and assistance is that "the debtor's main property in the Mainland is located in the pilot area (note: Shanghai, Xiamen and Shenzhen), and there is a place of business in the pilot area or a representative office in the pilot area", and at the same time, it is required to first pay off the debts that should be paid off in the Mainland, and then distribute and settle them equally in accordance with the Hong Kong liquidation procedure, so that the property of the mainland school can form a certain "segregation" from the Hong Kong liquidation procedure”。
Debt defaults are disputed
Greek International issued a statement on March 4, saying that it was unable to repay the US$315 million convertible bonds that creditors chose to redeem due to the external environment and financial situation.
However, the special group of creditors did not believe that the company was unable to pay its debts, and the company's stated reasons for not being able to pay its debts were not valid. In its statement, the group pointed out that the company had not been able to make substantial contact with the bondholders, that the company was in good condition and fully capable of repaying its debts in a responsible manner, and that the default was a deliberate evasion of the bonds.
The creditors' special group believed that the Greek Group had deliberately breached the contract, mainly arguing that the Greek Group had not communicated substantively with the creditors and that the statement it made in the announcement was misleading.
Creditors said that until October 2023 (four months before the default), some creditors had proposed refinancing to Xijiao International to provide funds for the company through the subscription and issuance of new US$100 million convertible bonds, so that it could repurchase the relevant convertible bonds at a discount in the secondary market through new financing, but they were rejected. At that time, the company proposed that there were no difficulties and that there were a variety of newer financing options with lower interest rates and lower costs.
In its 2023 results announcement released on 30 November 2023, the Directors are satisfied that the Group is capable of fully discharging its financial obligations when the foreseeable future financial obligations expire, taking into account the above undrawn bank and other facilities and the cash inflows generated by the Group's operations. ”
However, at its annual results conference, the response of the head of Greek Education International became ambiguous. At the results conference on December 1, 2023, when asked whether he could fulfill the bond redemption obligation on March 2, 2024, Huang Zhongcai, vice president and joint company secretary of Xijiao International, was not clear about the debt repayment, but said that "it is guaranteed to be implemented smoothly".
On 10 January 2024, the Special Creditors Association sent a letter to the Company stating the identity of the Special Creditors Group and its claims.
A creditor told the 21st Century Business Herald reporter that in the cases he handled, if it is a company with actual financial difficulties, it usually sets up a team to communicate with creditors at least half a year in advance. However, it was not until March 14 that the company held its first offline meeting with creditor groups, more than two months after the creditors sent their letter in January. At that meeting, however, no substantive progress had been proposed.
The creditor pointed out that in the offline meeting with the creditors, Xijiao International did not put forward any feasible plan, but stated to the creditors that its repayment difficulties needed to be postponed, or let the creditors consider converting shares. But there are no details, including how long it will be extended, the share transfer plan, and so on. According to the creditor, "the meeting did not put forward any substantive plan at all, there was no sincerity to solve the problem, and it was like a notice or order for the breach of contract, which was unacceptable." Except for this offline meeting, the company has not had any communication with creditors.
In addition to the company's attitude, the special group of creditors also believes that the company's current total cash and bank balances are sufficient to repay the total outstanding principal amount of the bonds. In its announcement, the special group of creditors pointed out that in addition to the nearly 3 billion yuan of cash on the company's books, the company's liquidity will be further improved after receiving about 1 billion yuan of tuition fees on a quarterly basis in the fourth quarter of 2023, which will provide the company with sufficient liquidity to meet redemption obligations.
At the same time, the company stated in its annual report that "the Group has obtained sufficient credit facilities to repay the maturing bonds". The reference to "unused bank and other facilities and cash inflows from the Group's operations" includes RMB1.188 billion of undrawn bank facilities provided by licensed banks in Chinese mainland, as well as regulatory authorities approving the issuance of up to US$125 million of overseas debt and up to RMB970 million of asset-backed notes, all of which can provide sufficient liquidity for the Company to meet its redemption obligations.
Creditors said that this default event will not only affect Xijiao International, but is more likely to affect a number of listed higher education companies of the same type and affect the financing of other issuers. At the same time, as a company in the education industry, related debt disputes may also affect the education of school students.
In the announcement, the Special Group of Bondholders pointed out that after the service of the winding-up petition, the Special Group of Bondholders will contact the relevant regulators and ministries to convey the statement of the responsibility of Greek Education International for the event of default, and expose the behavior of the company's management team to assess its suitability to manage the educational institution.
The debt service challenge behind the rapid expansion
After its listing in 2018, Xijiao International began its rapid expansion. From its listing in 2018 to 2024, Greek Education International has added a total of 15 schools, bringing the total number of schools to 24, of which three are overseas institutions, namely from Malaysia, Thailand and Hungary. According to the investigation of 21 reporters, one of the considerations for the acquisition of these overseas colleges and universities by Hope Group is to promote the development of their overseas education.
According to the company's financial report, in the 2023-2024 academic year, the number of international students in Xijiao will exceed 100,000 for the first time, and the number of students will reach a record high of 290,000. Its total operating income also increased rapidly from 1.331 billion yuan in 2019 to 3.582 billion yuan in 2023, and its gross profit margin remained above 45%.
However, behind the rapid expansion, the Greek group has a lot of "sequelae", and the debt pressure it faces is growing.
Looking through the financial report of Xijiao International, it can be seen that its current liabilities have risen rapidly since 2019, reaching 9.411 billion yuan. Its current liabilities mainly consist of convertible bonds of RMB2.18 billion, payables and accruals of RMB2.83 billion, bank and other borrowings of RMB1.64 billion, and contractual liabilities of RMB2.12 billion. Excluding contractual liabilities dominated by deferred income, there are still $7.291 billion. However, its current assets were only $4.1 billion, of which cash and cash equivalents were $2.8 billion, assets classified for sale were $390 million, and prepayments and other receivables were $669 million.
In the continuing operation of net current liabilities, the Board of Directors believes that it is capable of fulfilling its financial responsibilities in the future due to the amount of bank financing that can be withdrawn from 1 to 5 years is 1.188 billion yuan, the total approved credit line of foreign debt and onshore asset-backed notes (ABNs) is 1.867 billion yuan, and the cash flow related to education services is expected to be collected from students. However, judging from the public information, until the convertible bond officially defaulted, Greek Education International did not issue relevant debts to support the convertible bonds that were about to default.
Zuo Fengming, an analyst at China Chengxin (Asia-Pacific) Credit Rating Co., Ltd., told the 21st Century Business Herald reporter that although the overseas Chinese-funded U.S. bond market will be sluggish as a whole in 2023, it will be mainly affected by real estate bonds and urban investment bonds. However, he also said that since the U.S. started the interest rate hike cycle in 2022, the overall cost of bond issuance has increased significantly, which may affect the willingness of companies to issue bonds.
According to a report by China Chengxin (Asia Pacific) Credit Rating Co., Ltd., the new issuance of Chinese-funded foreign bonds declined in 2023, and the net financing amount recorded a negative value for two consecutive years. New issuance of Chinese U.S. bonds in 2023 is significantly lower than before the 2022 rate hike cycle. At the same time, the amount of new industrial bond issuance fell sharply in 2023, with the amount of issuance falling sharply by 64.8% to US$4.46 billion. For the ABN market, according to the report of the Investment Bank of the Agricultural Bank of China, the number and scale of ABN projects issued in 2023 decreased by 13.71% and 31.45% year-on-year
In fact, in order to cope with the company's debt pressure, Greek Education International has begun to sell some related assets. On January 31, Hope Education sold 100% of the shares of the target companies, Jiangxi Changzhen Industrial Co., Ltd. and Nanchang University Gongqing College Logistics Service Co., Ltd., for 500 million yuan. According to the announcement of Xijiao International, the sale aims to raise funds, alleviate the pressure of investment in running schools, and "meet the needs of existing colleges and universities for basic education, college renovation and expansion, and promotion of for-profit choices".
Although the sale of related projects has begun, it is not easy to sell the assets of the university.
An investor who had intended to invest in the higher education industry told the 21st Century Business Herald reporter that after investigation, he found that although the profit margin of the higher education industry is high, the assets of the industry are too heavy, which is a medium and long-term investment. However, considering that the number of school-age children will show a downward trend in the long run, there will be a surplus of resources in the university education industry, and at the same time, the quality of private colleges and universities will be uneven, and there will be a large gap between different programs. If you want to sell related projects, it will take a long time to monetize.
(Editor: Zhu Lina)
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