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(Bloomberg Opinion) -- Sometimes, letting go is the hardest thing to do. China’s most ambitious companies have yet to learn that lesson.
The corporate sector has gone on a global shopping spree in recent years, buying expensive assets by raising new debt. Now, struggling to repay their loans, some are unwilling to part with their purchases, even as they walk to the brink of bankruptcy. The end result can only be untimely defaults.
Consider Tianqi Lithium Corp., China’s largest lithium carbonate producer and a key supplier to the buzzing electric vehicle industry. It may default on a $1.88 billion loan due late November, the company warned recently.
Tianqi’s woes began in 2018 when it made a highly leveraged acquisition of a 23.77% stake in Chilean lithium miner Sociedad Quimica y Minera de Chile SA. Of the $4.1 billion Tianqi paid, a whopping $3.5 billion was borrowed money, syndicated by China Citic Bank Corp. As of late September, the company was already behind on 464 million yuan ($69 million) of interest payments on loans for the deal.
An obvious solution to meet its deadline would be to divest the SQM stake, a non-core asset. Granted, the company would be selling at a substantial loss. It bought at $65 a share, and SQM is now trading at roughly half the price, as lithium compound prices have tumbled since the purchase. Nonetheless, an outright sale would be enough to repay the syndicated lenders in November.
Tianqi seems unwilling to bite the bullet. Instead it's looking for roundabout ways to dig itself out. The company is searching for strategic investors; and its parent Chengdu Tianqi Industry Group Co., which has a one-third stake, has pledged out most of its shares to support Tianqi’s finances. These margin loans are risky: More than half are due within six months.
As Tianqi dithers, it’s paying a hefty price. Margin calls aside, the company is missing the stock market’s euphoria for Tesla Inc.’s suppliers. Until just a few months ago, Tianqi’s shares closely tracked those of its largest competitor, Ganfeng Lithium Co. Now, its imminent debt crisis is creating a divergence. While Ganfeng is up 63% this year, Tianqi has lost over 30% of its market value, or about $2 billion.
Even as it struggles to service debt, fashion conglomerate Shandong Ruyi Technology Group Co. — best known for its ambition to become China’s LVMH Moet Hennessy Louis Vuitton SE — is also unwilling to part with its prized purchases. Its $300 million dollar bond due in July 2022 now has an ask yield of 20%.
Already, Ruyi’s ability to retain control over its overseas assets is slipping. In May, Renown Inc., the century-old Japanese apparel maker the company bought into as early as 2010, filed for bankruptcy. Then in August, Ruyi brushed aside a sale of spandex maker Lycra Co. It got control of the company in a $2.6 billion deal last year; now it’s looking to take the long and uncertain route to an initial public offering.