Investment company Citic Group has come to the rescue of its ailing Hong Kong affiliate Citic Pacific by lending HK$11.6 billion to cover its bad currency debts of over HK$15 billion.

The bailout news saw Hong Kong-traded Citic Pacific's shares, which resumed trading yesterday after a suspension, rise 9.24 percent to close at HK$6.62.

In a statement, Citic Pacific said its Beijing-based parent Citic Group will provide standby credit of HK$11.6 billion by buying its convertible bonds.

Citic Pacific will issue the bonds at a conversion price of HK$8 per share.

The conversion price represents a 32 percent premium over the HK$6.06 trading price of Citic Pacific shares on October 31, when they were suspended. It also represents a 71.2 percent discount when compared with the unaudited net asset value of Citic Pacific on June 30.

Under the terms of the deal, Citic Group can also raise its holdings in Citic Pacific from 29.44 percent presently to 57.6 percent if it opts for full conversion of the bonds. This would make Citic the largest shareholder in Citic Pacific.

However, the 18.98 percent stake held by Citic Pacific Chairman Larry Yung will be diluted if the option is exercised.

Conita Hung, head of research of Delta Asia Securities, remained doubtful about the effectiveness of the bailout.

"In the long run, it remains unclear whether the company needs to make further write-down for the deal," she said. "Investors, therefore, should adopt a wait-and-see approach until the company has truly strengthened its corporate governance."

The statement said that Citic Pacific will now keep only several Australian dollar leveraged contract accounts under the company's name for its iron ore businesses in Australia. Citic Group will step in to undertake Citic Pacific's unsettled debts regarding its currency contracts.

In addition, Citic Pacific will set up a committee to deal with all the issues associated with Australian dollar leveraged contracts and the committee will be headed by the company's executive director and Vice-President Chang Zhenming.

Chang said the arrangement will help restore public confidence in the company and also help develop various businesses.

Yung said Citic will continue to engage in its core businesses such as property, iron mining and steel manufacturing.

Citic Pacific had earlier said it incurred HK$15 billion losses after making wrong bets on the Australian dollar on Oct 20. The company's managing director Henry Fan had subsequently stepped down from his outside posts in regulators to avoid any conflict of interest.

(China Daily November 14, 2008)