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Chinese Money Keeps Coal Mines Humming - Heard on the Street
China's state-run industrial complex has distorted commodity markets plenty by keeping unprofitable production alive--both at home and abroad. This time, it is enlisting the help of a Chinese private-equity firm.
Australia-listed midsize coal producer Yancoal said one if its units will issue nine-year bonds valued at $950 million. The bondholders: two state-run Chinese banks and a subsidiary of a fledgling Chinese private-investment firm called Bohai Harvest, whose board roster includes Hunter Biden, son of U.S. Vice President Joe Biden.
Yancoal itself is owned by Chinese state-run coal-mining company Yanzhou Coal, but this deal isn't exactly a case of Chinese financiers making sacriices for national service. The three investors have structured the deal well to their advantage. They will collect interest of 8.55% a year on $760 million of the bonds, plus perform. The bonds are secured against these mines.
As a sign of what it takes to attract investors to coal these days, the bondholders are even protected against failure. They can sell their bonds to the parent off Chinese state coal-ming company at various points during the nine years, that too at face value.
Bohai Harvest gets to control these mines, though Yancoal retains techincal ownership while operating them. In essence, this looks like an asset sale the parties would reverse in nine years.
In exchange,Yancoal,whoes market value has shrunk more than 90% since 2012 to $61 million,gets nearly $1 billion in cash up front. That is handy given the mining company reported 12consecutive quarters of negative net operating cash flow. Yancoal,which anyway enjoys Yanzhou Coal's backstop,gets more life support.
Another beneficiary of this deal is Noble Group,the embattled commodities trader that is Yancoal's second-largest shareholder.Noble's accounting of its Yancoal stake has come under attack from investors previously: As of June, it carried Yancoal on its books at roughly 20 times its then-market value. Noble's value ffor Yancoal could ffind support since the Aussie asset's heightened access to liquidity reduces its inherent riskiness.
The victim of all this is the global coal market. Thermal coal prices, at roughly a third of their peak in 2011,are screming for supply to be curtailed. Yancoal's continues existence will have them screaming longer.
Write to Abheek Bhattacharya at email@example.com
(END) Dow Jones Newswires
February 18,2016 06:15 ET(11:15 GMT)
Dow Jones & Company,lnc.