Zhitong Finance App News, Zhongjun Commercial Management (00606) and Zhongjun Group Holdings (01966) jointly announced that on November 24, 2022, the lender (an indirect wholly-owned subsidiary of Zhongjun Commercial Management) signed a loan agreement with the borrower (Zhongjun's indirect wholly-owned subsidiary). The lender conditionally agreed to issue a loan of up to RMB 900 million to the borrower for a fixed period of time from the date of withdrawal to 31 December 2024. On November 19, 2024, the lender entered into a supplementary loan agreement with the borrower, and the lender conditionally agreed (among others) to extend the maturity date of the loan until December 31, 2026. On August 31, 2026 (that is, in terms of determining the amount of debt, the last practical date before publication of this announcement), the debt owed by Zhongjun Group to Zhongjun Commercial Management Group under the revised loan agreement was approximately RMB 908.4 million, or the sum of the outstanding loan principal amount of RMB 900 million and the accrued interest payable by the borrower under the revised loan agreement of approximately RMB 8.4 million.
As the loan is about to expire, on October 27, 2026, the seller (Zhongjun's indirect wholly-owned subsidiary) entered into a share transfer agreement with the buyer (a direct wholly-owned subsidiary of Zhongjun Commercial Management). The seller conditionally agreed to sell, and the buyer conditionally agreed to buy the target shares to settle the debt. The buyer shall pay the seller RMB 1.06 billion in respect of the transaction in accordance with the share transfer agreement. It shall first be paid by offsetting the debt (the total amount accrued on the date of transaction) and the price in equal amounts at the time of transaction. Any balance of the above offset price shall be settled by the buyer's payment to the seller at the time of the transaction.
Target shares consist of all of the issued shares of target company A, target company B, and target company C. On the date of the share transfer agreement and immediately prior to the transaction, each member company of the target group was an indirect wholly-owned subsidiary of Zhongjun. At the time of transaction, each member company of the target group will become an indirect non-wholly-owned subsidiary of Zhongjun; and Zhongjun Commercial Management Group will acquire all of the issued share capital of the target company, and each member company of the target group will become an indirect wholly-owned subsidiary of Zhongjun Commercial Management.
From the perspective of Zhongjun Group, the sale of target shares provides a way to effectively settle its debt under the revised loan agreement to avoid any repayment default without triggering any significant cash outflow. Director Zhong Jun believes that compared to other methods of settling this debt, the method of offsetting at cost is preferable. The reasons are as follows:
Given that Zhongjun Group continued to record net cash outflows in the recent financial year and its limited cash resources, significant cash outflows related to repayment of this debt in cash will further damage its cash position. This may cause Zhongjun Group to face significant difficulties in coping with its recent working capital requirements and capital expenses;
It is not appropriate to seek a further extension of the loan period from Zhongjun Commercial Management Group because the loan itself is interest-bearing. By fully settling this debt on or before the current fixed maturity date, a further increase in the financial burden on Zhongjun Group can be avoided. Furthermore, repayment of the loan will help reduce the leverage level of Zhongjun Group and improve its financial situation, and accordingly reduce the financial risks it faces and the impact of adverse developments in the economic environment. As a result, Zhongjun Group will be in a better position to seize future business development opportunities; and
Considering the current liquidity situation and current financing conditions of Zhongjun Group, it may not be possible to refinance by obtaining additional external loans from third parties. Furthermore, similar to extending this loan, this move will incur additional interest burdens and adversely affect Zhongjun Group's leverage position.
From the perspective of Zhongjun Commercial Management Group, the transaction ensures timely and proper recovery of advances and interest income generated under the revised loan agreement in the form of equivalent assets on or before the maturity date, and effectively eliminates related credit risks. In evaluating settlement options, the directors of Zhongjun Commercial Management have taken into account that Zhongjun Group currently has limited cash and cash equivalent balances and is in net debt, and has encountered difficulties in fulfilling payment obligations relating to multiple senior notes issued by Zhongjun and term loan financing provided by external lenders. There is uncertainty as to whether Zhongjun Group has sufficient financial resources to fully settle the debt through cash settlement when it matures. Director Zhong Jun Commercial Management believes that it is appropriate and desirable to settle this debt by accepting cost offsets to avoid any potential concessions or delays in payment.
Furthermore, by acquiring target shares, Zhongjun Commercial Management Group can expand its existing property investment business by acquiring additional commercial properties owned by the target group. Zhongjun Commercial Management Group will not only enhance its profitability, but will also be able to seize the growth and profit potential of the target group (especially the commercial properties it holds). Among the properties of Zhongjun Group, the director of Zhongjun Commercial Management selected commercial properties held by the target group as the acquisition target because the property has been pledged to the lender as a guarantee for the loan and designated to settle the debt when the borrower is unable to fulfill any payment obligations under the revised loan agreement; and Zhongjun Commercial Management Group has always provided management and operation services for such commercial properties, and has participated in and familiar with their operation to a certain extent, will be able to effectively use such commercial properties after the transaction, and the ownership structure changes under the transaction will quickly operate them on a daily basis The interference caused is minimal. After the transaction, Zhongjun Commercial Management Group plans to generate rental income from such commercial properties.