Friday, October 5, 2012

Focus media bank loans

Focus Media has accounts that suggest it is massively cash generative. According to their accounts they are sitting on over $500 million in cash - in this case all in Renminbi.

They also have expanding bank loans - now over USD200 million.  These loans are made in US dollars backed by LOCs issued by a Chinese bank.

I have heard several (contradictory) theories for why these transactions were made in this manner.

I figured if I put this disclosure up readers might propose even more contradictory theories in their comments.

At least that is what I am looking for.


14. Bank Loans

  NotesDecember 31,
Short -term revolving loan
Long -term revolving loan


Additional available long -term loan facilities

a)The short-term revolving loan is denominated in U.S. Dollars, was obtained from a large commercial institution outside of the PRC (“Bank A”), and is secured by a stand-by letter of credit issued by PRC based financial institution (“Bank B”). The stand-by letter of credit is secured by short-term deposits of RMB628,030,000 (equivalent to $99,673,063), which is recorded as restricted cash on the Group’s balance sheet. The Group paid RMB 4,095,000 (equivalent to $649,907) to Bank B to issue the stand-by letter of credit to Bank A. The short-term revolving loan bears interest, which is payable monthly, at the rate of two-week LIBOR plus 2.1% per annum. The weighted average interest rate of this loan for the year ended December 31, 2011 was approximately 2.4%. The short-term loan is payable in November 2012.
b)The long -term revolving loan is denominated in U.S. Dollars, was obtained from Bank A, and is secured by a stand-by letter of credit issued by Bank B. The stand-by letter of credit is secured by restricted long-term deposits of RMB 628,030,000 (equivalent to $99,673,063) deposited in Bank B, The deposit is recorded as restricted cash on the Group’s balance sheet. The Group paid RMB 3,965,000 (equivalent to $629,275) to Bank B to issue the stand-by letter of credit required by Bank A, The costs incurred in connection with the stand-by letter of credit are being amortized to interest expense over the term of the loan. The loan bears interest, which is payable monthly, at the rate of two-week LIBOR plus 2.1%, 2.4% and 2.7% per annum for each of the twelve months ending December 8, 2012, 2013 and 2014, respectively. The weighted average interest rate of this loan for the year ended December 31, 2011 was about 2.4%. The principal of the loan is payable in two installments of $17,750,000 and $53,250,000, which are due in December 2013 and December 2014, respectively.
Neither the short-term or long-term bank loan contains financial covenants.

Source: here.


Anonymous said...

It's strange we still haven't heard from the banks about closing the financing. According to the following links, it shall take 2-3 weeks (from 9/11):

No news so far, which is not a good sign for them.

Anonymous said...

Punting on RMB appreciation?

Anonymous said...

so they deposited 200mn cash to borrow 170mn?

Anonymous said...

They borrow US$ and pay 2.4% interest whilst depositing RMB and earning maybe 4% or 5%. There should certainly be a positive interest rate spread for them.

They have currency exposure of course, but they may be betting the RMB is more likely to rise against the US$.

Anonymous said...

Ctrip just issued a $180m USD based CB. They also have ~$150m in USD debt. All while holding over $800m RMB based cash.

What a scam!

J said...

They can't pay dividends in the US due to SAFE expatriation regs - the loan is their only way to access USD. Restricted cash amount is probably real but who knows about the rest.

John, why don't you reply to my email?

Matteo said...

Parmalat anyone? same story here...

Anonymous said...

FX spec or total scam.

~ former FX guy

David said...

I admit I dont get it, seems like a reasonable way to manage liquidity. Using excess Renimbi cash to secure a cross currency loan.

A couple of thoughts though.
1. Why does the company need USD?
2. Why are the names of the two banks not stated?

Detlef Guertler said...

Of course you would never try to make us believe that the "short-term deposits of RMB628,030,000" simply don't exist. Or that the "letter of credit" is worth its weight in paper. Or that "Bank B" is just Focus Media's partner in fraud.

Anonymous said...

It's a pity non of the commentators above actually read the filings, as it relates to FMCN's bank loans...


BG said...

Looks like they are using the same $99,673,063 restricted cash to get both loans amounting to 170 million. With no covenants and only 58% collateral in the form of restricted cash, in addition to the credit spreads they gain, seems like a no brainer for the company.

But given the low interest they pay, one wonders if bank A is offering them these loans in an attempt to provide them liquidity until ad deal goes through. This hypothesis only holds water if the business is not as cash generative as it says it is.

Anonymous said...

My theory:

RMB is not freely convertible, and chinese authorities like to let money in, but are reluctant to let profits leave the country again.

Reading this disclosure a while back, it made me think twice of buying into even supposedly safe chinese companies like BIDU.

Anonymous said...

in a chinese blog i read a few days ago, someone claimed to have met with Block at Muddy Water. this person was asked by a VP of finance in FMCN to approach Muddy water to see if they are one of the tiger funds. in the meeting, he claims Block says he is working on a research related to a search company in china, and this company shall be punished because they help the chinese government is restricting people's right. it sounds like bidu to me..

Anonymous said...

Only dividends can be paid to the offshore companies and that has to be approved by the governments / regulators. Instead this form of cash loan at offshore level backed by SBLC from Chinese bank is one way in which note holders of offshore entities can be paid / repaid. The Chinese bank is anyway dependent on cash collateralised against its SBLC and runs no credit risk whilst the offshore lender runs credit risk on the Chinese bank. Is this not a common thing in Chinese VIEs? (John: do not understand what you are implying here? Sorry .. if I am way off track on this) ....
Many thanks

Colin P said...

Anonymous at 12:48, could you please provide the link to this blog so that the rest of us can read it? Much appreciated.

John Hempton said...

The obvious interpretation is that they are using this as a mechanism to get money out of China.

The implication is of course they have trouble just taking it out.

This is a big problem for the private equity deal - because if they can't take money out of China they can't repay the 1.5 billion plus they intend to borrow.

I am however not sure this obvoius interpretation is correct. Much more cynical (and speculative) things come to my mind.


Anonymous said...

here is the link:

标  题: 混水采访记
发信站: BBS 未名空间站 (Thu Jul 19 03:11:40 2012, 美东)

混水的老板Carson Block,可能是无数中概老板心中的恶梦了。几个月前,我有一个采

有个小插曲,Carson不是new york的,他到这里是因为bloomberg有个会议什么的,他

那时,好像混水搞了FMCN? 国内的朋友说FMCN的老板电话她的老板,说有些问题要我问
问Carson,大概都是关于是不是一个老虎系的基金(黄经理?)在搞FMCN. 看来老板们
是不屑和Carson直接对阵的,派个VP, 至多一个CFO算是可以了。关键问题是他的老板
是谁?你摆平小鬼没有用的。 我朋友告诉我这个目的的时候,我第一反应就是这个是

来越少? 他说是的,容易的肉都吃了,剩下的是骨头和刺,去香港可能会有更多机会,

望的东西来糊弄人。不过这次在混水的报告里,第一次提到了human right。其实那句
话还是挺不错的:Our message to investors is that human rights and economic
rights are two sides of the same coin. 看来Carson是个美国的小将,我唯一能够


Anonymous said...

Here is my translation.
Disclaimer: I have no idea who this guy is and whether he’s telling a real story and made it up.

I am sorry about the grammar mistakes. :)
My Interview with Muddy Water
Jul 19

Carson Block, the boss of Muddy Water, is probably the nightmare of the bosses of "Chinese Concept Companies". A few months ago, I had the opportunity to interview him. I thought it would be a interesting read if I write it up. I do not work in the media industry, I am just a small potato guy working on wall street.

I was asked to help a friend of mine in China. She worked in a investment relationship company. So I got to interview him by chance.
Carson does not live in New York. He came here that day because there was some sort of conference held by Bloomberg and he was a guest. The IR firm provided me an address; it’s a middle-to-low class office. Carson was a little late. He said in the conference someone tried to beat him up, but got blocked by the security guy, so he was delayed.

I asked him when was the last time he was in China. He said it was two years ago, and that if he went back now, it could be life threatening. I thought so too. Among people who shorted “Chinese concept companies”, Carson is one of the most successful one, thanks to his strong Chinese experience. He first came to Shanghai in 2001 and had his own law firm there. I guess he’s probably very familiar with the taste of WuLiangYe and Maotai.

He didn’t have time to eat lunch, and was eating a subway sub. I asked him what Chinese food he liked. He said anything except fish. He didn't like fish bones.

Anonymous said...

At that time, Muddy Water just published a report about FMCN. My friend in China said the boss of FMCN called her boss, saying he has some questions to ask Carson. It's probably questions about whether it was he one of the "Tiger's funds"(Translator: I have no idea what he mean of tiger funds) who are messing up with FMCN. So it appears the bosses care not to talk to Carson directly. They think sending a VP, at most a CFO , was more than enough. They wanted to know who was Carson’s boss. Fixing up the small guy is useless. They wanted to know who's behind him. When my friend told me their goal, my first reaction was they won’t have an answer. But still, I had to try. I asked Carson the question, he said it’s none-sense. He and his friends are all using their own money. Each report costed about 150k-200k dollar and a period of 6 months. In the beginning, it was just himself. Later, he became famous, and there were people who gave him information. From his reaction to my question, he seemed clearly understand the difference between the Beijing’s "Tiger's funds" and Hong Kong’s "Tiger's funds". He probably know them well and hang out with them. He should only have one team and thus does not have the ability to work on more than two reports at the same time (SPRD is probably this case, “forcing duck to climb a tree”).

Then, I asked him some more questions. He mentioned the risky and dangerous business climate in China. I asked him if he is finding less and less candidate to report on. He said yes. The easy meat have been eaten. What’s left are bones. Hong Kong might have some more opportunities. There are still some big ones there. I asked him to give an example. He said there’s a mainland china internet searching company (don’t think, it’s THAT one), whose shameless sales ads has already reached his cellphone. He’s very sick of them. His wife went to work there as a spy, and chatted with people there, and found things that are very unreasonable.
Carson is a businessman. Same as Yu (ceo of EDU). Except Carson is more pure. He doesn't need to do things like “finding hope from disappointment” to fool people. But in their report this time, they mentioned “human rights” for the first time. I think it’s not bad: “Our message to investors is that human rights and economic rights are two sides of the same coin”. From this, I could only think of that company will relate to this.

EDU invited Robin Li to help investigation. Muddy Water said, "please, Li don’t lie anymore. Your butt is not clean too. "

Anonymous said...

Block could have been referring to QIHU. I believe they've been pushing garbage to cellphones. Assuming this is even authentic,,,,, The author seems to drop a number of personal items, subway sandwich, attacker blocked by security, doesn't like fish bones etc,,, perhaps too many? Perhaps I'm paranoid? And would Block send his wife into a potentially dangerous environment when he's hired people in the past,,,,

Anonymous said...

John, have you looked at Focus Media Network, a HK listed stock, They claim to have no current shareholding link with FMCN but due to a historical connection have licenced the Focus Media name for use in HK and Singapore. Based on their latest numbers they are reporting annualised revenue per screen even higher than FMCN, US$7,000 equivalent per screen.

cargocultinvestor said...

Possible explanation.
It sounds like the rmbi cash is real..... but it isn't necessarily Focus Media's.
If the rmbi deposit was supplied by a 3rd party and then was lost on a default, because the loaned USD's go to an offshore account of the guy who supplied the rmbi via something like selling a worthless shell company to FMCN and then buying it back for zero, you'd have a pretty slick conduit for moving money out of China. This doesn't require Focus to have any real cash of their own, or a real business for that matter. There is a large amount of money generated through corruption looking for a way out, that's for sure. The quid pro quo would likely be to the jokers running Focus not Focus itself. Of course I'm sure of nothing.
PS I can't seem to prove I'm not a robot

Anonymous said...

Have people forgotten liar's loans in the US?

How is FMCN any different? Let me spell it out for you:

1. FMCN has a history of fraudulent behavior and reporting

2. FMCN has motive to lie/steal ... motive = buybacks/dividend.

3. FMCN has opportunity to steal via loans (thanks to the kindness of foreigners)

4. Having fooled foreign banks into lending it money, FMCN looks to now go private, so they don't have to worry about being uncovered under the public eye...


Sean said...

About Focus Media 8112.HK, it is logical that revenue/screen there SHOULD be massively higher than FMCN. They claim they are a monopoly in HK and the largest player in Singapore and only put the screens in the lobbies (by far the most eyeballs) of prime buildings in prime districts of HK and Singapore. This is a far cry from FMCN's base - many "screens" that are really boards on the 18th floor of buildings (fewer eyeballs) with average occupant income 1/5 of that of 8112.HK in many cases.

Anonymous said...

Sean, also put screens on drug store chains (Watsons and Mannings). I agree their per screen revenue should be higher than FMCN, but not massively so.

FMCN have screens in lobbies of prime office sites in Shanghai, and i'm guessing they dont tell advertisers about the basement screens just like they didn't tell them about the LCD screens which were actually picture frames.

Anonymous said...

"...[I]'m guessing they dont tell advertisers about the basement screens just like they didn't tell them about the LCD screens which were actually picture frames."

You're guessing wrong. The Focus Media contracts with advertisers give the location and type of each screen. Advertisers can and do audit their Focus placements regularly. Just because Muddy Waters pointed out the moronic classification system doesn't mean that advertisers are blindly buying based on trust in Focus Media. The customers (the ones who are real at least) are smarter about advertising than you give them credit.

Anonymous said...


Anonymous said...

Bank of China Warns of Ponzi Schemes;

Anonymous said...

Is there a signed agreement to buy FMCN or is it simply a non-binding letter of interest?

andrew said...

that have very authentic Focus media bank loans article very appreciate this kind of useful service.

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