Published January 2, 2009

Who's behind Bio-Treat's key creditor, shareholder

By LYNETTE KHOO

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HOLDERS of Bio-Treat's convertible bonds (CBs) are probably feeling more uncertain about whether they can recover their investment, as it now appears that resolving Bio-Treat's default on a loan has taken on a higher priority. Yet no one is any the wiser as to who that creditor really is.

Last month, Bio-Treat pledged all of its assets to Precious Wise Group for outstanding debt owed under a HK$360 million (S$66.7 million) loan facility, and Precious Wise has invoked its rights to secure the pledged assets until the outstanding sum is paid.

While the jury is out on whether Precious Wise is entitled to force-sell Bio-Treat's assets, Bio-Treat bondholders have effectively been relegated to second place in terms of repayment.

At this point, we probably require some recall on what has happened. First, Bio-Treat issued $206 million of convertible bonds in 2006, due to mature in 2013. But the first opportunity to cash out, in January 2008, saw bondholders exercise put options on more than half the principal value of the bonds.

This need to redeem the CBs sent Bio-Treat on a fund-raising spree that consisted of botched attempts to issue notes, warrants and rights shares. A HK$360 million loan facility with a seven-year maturity from Precious Wise - then a substantial shareholder, with close to 30 per cent stake - went through in January 2008.

Next came notices of default from some bondholders who had exercised put options. This triggered a default on the loan from Precious Wise, based on the terms of the loan agreement.

Such a condition in the agreement raises several questions. Wouldn't such a clause be too important to have been left out when Bio-Treat made a public announcement on the loan agreement? And what will be left for other creditors, such as banks and bondholders, should Bio-Treat's assets be seized by Precious Wise? Also, will this jeopardise any refinancing plan Bio-Treat has for the CB programme?

Bio-Treat has assured investors that it still owns and operates its waste-water treatment plants. But this assurance, without any legal basis, gives little comfort at this point in time.

Words have been said, and lost. In October last year, Bio-Treat said Precious Wise had agreed to work on a repayment plan and 'has continued to show its support' by allowing Bio-Treat to further draw down a sum of HK$35 million under the loan facility.

Barely a month later, Precious Wise ceased to be a shareholder of Bio-Treat when it transferred its shares to its parent, Dongguan Baosheng Environmental Investment Co. The latter, in turn, sold Precious Wise to an 'independent third-party', in the words of Bio-Treat chief financial officer Alan Lau.

Mr Lau has said that he is not privy to the identity of this third party. But in the light of the potential influence the third party could have on negotiations over the loan's repayment, some information on this new parent of Precious Wise is necessary.

One will remember the same obscurity surrounding Precious Wise's identity when it first became a substantial shareholder of Bio-Treat in September 2007 through an 'off-market transaction' said to have involved shares of former chairman Wing Hak Man.

Disclosures by Bio-Treat last year mentioned that Precious Wise is fully owned by Dongguan Baosheng, which is part of an investment group of companies based in China that are owned, managed and controlled by several private entrepreneurs.

Bio-Treat said the same when queried by BT this week. So who are these entrepreneurs? And could they in any way be related to Bio-Treat's initial shareholders at pre-listing?

The group counted among its substantial shareholders Mr Wing, current CEO Chan Kong and some Hong Kong businessmen through their investment vehicles, according to its IPO prospectus dated Feb 7, 2004. Hong Kong-listed Global Green Technology, a company said to be linked to Michael Leung, held an indirect 8 per cent stake then. Incidentally, Mr Leung was charged last year by US regulators over insider trading involving Dow Jones shares - he was said to have known about Dow Jones' takeover by News Corp - and paid a sum to settle charges.

As far as Bio-Treat is concerned, some of the early names no longer appear in Bio-Treat's annual reports.

As investors seek greater clarity on the loan repayment and CB issues, they will be closely watching the next move by Precious Wise or Dongguan Baosheng. It is, therefore, perplexing that information on these players is not forthcoming.

This is all the more so, given that Bio-Treat's ability to continue as a going concern now depends on whether it can repay debts owed under the CB programme, which now appears to be complicated by the loan agreement that works in favour of Precious Wise.

To be fair, current credit conditions make it harder for Bio-Treat to obtain refinancing to resolve the CB issue and loan repayment.

But while hard negotiations are under way, some disclosure on the key players and their motivations should not be too hard. With continuing confusion over the state of affairs at Bio-Treat, its shareholders and bondholders are hard done by.

It's a pity that one year has passed and investors still find themselves in the same spot.