Risk of More Hong Kong Bankruptcies as Crisis Spreads

HONG KONG (Reuters) – A string of bankruptcies in Hong Kong shows the days of easy money here are over, with more collapses likely if companies fail to manage their debt loads.

Analysts had considered companies in Hong Kong and throughout China as being better protected against the global financial crisis, since local banks remain well capitalized and underlying business fundamentals remain strong compared with other parts of the world.

That is changing by the minute, though, thanks to the credit freeze hitting many Western financial institutions and a pullback by local lenders in response.

Companies that took on loans expecting cheap and readily available financing from banks may be in for a shock.

“You had a lot of treasurers borrow money here, borrow money there and they kept rolling it over into a spaghetti bowl of debt,” said a Hong Kong investment banker at a large European bank, who did not want to be named due to the sensitivity of the issue.

“And they weren’t too focused on the shortness of maturity profile. They took a view that the markets would always be open.

“The reality is that the credit crunch has truly arrived in Asia,” he added.

LIQUIDATIONS PILE

Swimsuit maker Tack Fat Group filed for liquidation last month.

Provisional liquidators were also appointed this week for garment maker and retailer U-Right International Holdings. Liquidator Deloitte Touche Tohmatsu said the company’s problem was rooted in over-investment. It owed about HK$1.2 billion to banks and financial institutions, local newspapers reported.

U-Right operates 95 shops in Hong Kong and has 516 retail outlets in China.

“Our goal now is to find a white knight,” Edmund Yeung of Deloitte told the South China Morning Post. “We are restructuring the company and are in talks with two or three potential buyers.”

The appointment of provisional liquidators means a company is technically bankrupt.

Last month, provisional liquidators were appointed for Hong Kong luxury watch retailer Peace Mark after the firm suspended its shares for nearly a month and sought a “white knight” suitor to shore up its balance sheet.

The company dived deeper into debt after it paid $368 million to buy Singapore-based luxury watch retailer Sincere Watch.

“This was a wholly preventable train wreck. If only the company had managed its securities,” said the banker at the European bank. “They should have cleaned up their debt.”

Peace Mark, which sells watches for brands including Rolex, Omega, Rado and Tissot, said on September 3 it could not meet the demands of banks to repay HK$1.22 billion ($156.4 million) in debt, capping months of speculation that it was struggling.

Chow Tai Fook Group, a jewelry manufacturer, late on Thursday agreed to buy Peace Mark for an undisclosed price.

Officials and economists warn the worst has not yet arrived in Hong Kong.

“It will come, particularly if exports deteriorate. That’s when consumers will hold off spending,” said Paul Tang, economist at Bank of East Asia.

Hong Kong’s central bank cut a combined 150 basis points in its benchmark discount window base rate this week in an effort to soothe the tightness in the money market.

But commercial banks kept their lending rates unchanged and threatened a possible increase if the HIBOR, their source of funding, continues to stay high.

By Michael Flaherty and Alison Leung

(Additional reporting by Jun Ebias; Editing by Mathew Veedon)