Jingrui Holdings has made a series of disclosure to the Hong Kong exchange, struggling to explain the mysterious disappearance of over RMB 4.9 billion ($730 million) in claimed bank deposits that led to PricewaterhouseCoopers resigning as its auditor in May.
The defaulting developer’s disagreement with its erstwhile auditor centres on bank confirmation letters for the RMB 4.9 billion amount that were sent by PwC to the Guangzhou and Shanghai branches of a domestic bank in February of this year, Jingrui said Monday in a filing with the Hong Kong stock exchange.
PwC in March received replies to all seven letters from the unidentified bank. But by April, when the accounting firm phoned the Guangzhou branch to confirm the letters’ authenticity, the auditor was told that the bank had no record of receiving or accepting the letters. In addition, the COVID-19 situation in Shanghai prevented PwC from contacting that branch to verify the content of the alleged bank letters.
Jingrui informed PwC verbally in May that the bank deposits had certain special arrangements such as pledges, fund transfers and counter-guarantees, and for this reason they might be restricted. PwC believed that the matter could have a significant impact on Jingrui’s 2021 financial statements, the release of which has been delayed, and the two sides were unable to agree on a timetable to complete the audit.
Question of Restrictions
Shanghai-based Jingrui said Monday that there was “no doubt about the authenticity” of the bank deposits.
“The issue concerns whether the bank deposits were restricted or not, and that would impact the classification of the bank deposits in the company’s consolidated financial statements,” co-chairmen Yan Hao and Chen Xin Ge said in the HKEX filing.
Jingrui’s board set up an independent committee on 18 July to engage a professional advisor to assist in conducting an investigation of the bank deposit issue and related internal control matters of the group.
Brock Silvers, chief investment officer at Hong Kong-based Kaiyuan Capital, said Jingrui looks to be “in an extremely compromised position”.
“The company’s RMB 4.9 billion in available bank deposits should have been reassuring to investors, but now seem to have been intentionally misrepresented,” the veteran China investor told Mingtiandi. “The documents attesting to the unencumbered deposits have been disavowed by the relevant bank, and the best-case scenario is the deposits actually exist, but are encumbered with pledges or guarantees.”
The falsification of bank statements by public companies is not an uncommon practice on the mainland, according to Silvers. The developer’s response has added to investor concerns, as the “independent committee” formed to investigate the matter consists solely of existing independent directors of the company.
“Jingrui is essentially investigating itself,” Silvers said.
New Offshore Default
The update on Jingrui’s dispute with its erstwhile auditor was released just days after the developer announced a fresh default last Friday, saying it expected not to make payment on a $260 million offshore bond maturing on Monday of this week.
That financial flop came after the developer failed to make on-time interest payments totalling $59.3 million on four sets of offshore bonds in June, with Jingrui blaming the defaults on the impact of China’s COVID-19 lockdown measures in the group’s home base of Shanghai and other key cities.
Also Friday, Jingrui said it had appointed Admiralty Harbour Capital as its financial advisor to assess the group’s capital structure and explore solutions to ease liquidity issues. The company named Sidley Austin as its legal advisor in support of the effort.
Hong Kong-based Admiralty Harbour has also been retained for its services by Jingrui’s fellow defaulters China Evergrande and Shimao Group, while American law firm Sidley Austin is advising Shimao and Modern Land China.