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Automobiles

BMW's Chinese partner reveals unauthorized loan guarantees for parent

Substantial bank deposits also missing from Brilliance Auto subsidiary

A BMW car takes part in the Auto China show in Beijing in September 2020.   © Reuters

HONG KONG -- BMW's Chinese joint venture partner Brilliance China Automotive said Wednesday that a subsidiary has provided unauthorized guarantees for bank loans made to their bankrupt parent, Huachen Automotive Group Holdings.

In a disclosure after market hours, Hong Kong-listed Brilliance Auto revealed that its wholly owned unit Shenyang JinBei Automotive Industry Holdings (SJAI) has guaranteed a total of 5.89 billion yuan ($900 million) for Huachen's borrowing from four mainland banks.

Huachen, owned by the Liaoning provincial government, entered bankruptcy proceedings last November after defaulting on onshore bonds. Its bankruptcy proceedings, along with other prominent defaults in China last year, sent shock waves through the bond market by destroying the notion that Chinese state-owned enterprises could not fail.

The actual amount of loans owed by Huachen to the four banks is 3.75 billion yuan. Brilliance Auto did not provide further details of these loans, including the interest rates and other terms or when the guarantees were made.

Banks have initiated legal proceedings against SJAI. The case opened by Harbin Bank is scheduled to have its first hearing on April 26, while those for Export-Import Bank of China and China Everbright Bank have yet to be scheduled. Huaxia Bank's position on legal action is not known.

Brilliance Auto also disclosed that a substantial amount of SJAI's bank deposits were missing. According to a letter received by the company's auditors from Shengjing Bank on Tuesday, total bank deposits were 1.73 billion yuan less than the amount listed in SJAI's books. A 650 million yuan structured deposit was also missing, although it was unclear whether this was part of the total missing amount.

In addition, SJAI has provided 650 million yuan of loan guarantees to two unspecified companies.

According to Brilliance Auto's annual report last April, SJAI has run the joint venture with BMW since March 2003. The venture -- called BMW Brilliance Automotive -- operates two vehicle assembly plants, a research and development center and an engine factory in Shenyang, the capital city of Liaoning Province.

Brilliance Auto said in the statement attributed to Chairman Wu Xiaoan that the board was "not aware" of these unauthorized guarantees until it was notified by the auditors recently. Similarly, the board said it "only came to notice" these missing deposits and additional guarantees on Tuesday when it received a letter from its auditors.

The board on Tuesday formed an independent committee comprised of its two outside non-executive directors to investigate the case with an independent firm. The board seeks to learn "whether there are any additional unauthorized guarantees apart from those identified so far" as well as the reasons for and consequences of these deals.

Brilliance Auto said on March 31 that it was unable to publish its annual results by that day. The company said the delay was caused mainly by "certain unauthorized guarantees and resulting legal proceedings involving a subsidiary," but did not provide further details.

Failing to meet the deadline for publishing annual results constitutes a breach of the Hong Kong stock exchange's listing rules, and trading in Brilliance Auto shares has been suspended. The company has said it would be unable to release the results before the end of April. Shares last traded at 7.30 Hong Kong dollars on March 30.

Huachen has been in bankruptcy proceedings since last fall under the Shenyang Intermediate People's Court. The court ruled in March in favor of merging Huachen with 11 other group companies in a joint rehabilitation. The first creditors conference is scheduled for April 20, according to the court.

Huachen's former chairman, Qi Yumin, was put under investigation in early December by the Central Commission for Discipline Inspection, China's most powerful graft buster, over a suspected violation of discipline. In a brief statement at the time, CCDI alleged Qi was "involved in serious violation of discipline and law" -- a phrase that typically implies the investigation is related to some form of corruption. No further details have been provided.

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