Energy Earth Bankruptcy

Introduction

Who is going to believe that one of the most well-known common stocks in Thailand of 2017 will be suspended by the Securities and Exchange Commission (SEC). Most of the investors might know about notorious stories of this stock, which is Energy Earth Public Company Limited.

Energy Earth Public Company Limited is a company that distributes many types of coal to many countries in Asia region, especially China. It gets coals from Indonesia by hiring other companies to mine the resource for them. One of the interesting facts is that this company once has the highest market capitalization up to 30 billion Baht and the stock was traded about 8.85 Baht per share. However, the stock price nowadays was suspended from trading and before the suspension, the stocks were traded at 1.46  Baht per share, which decreases more than eighty percent of its price. In this blog, we will try to explore what happens to the company, what went wrong with the stock and bond, who was affected by this situation, what types of risks are realized, and what are the responses of SEC.

What went wrong with Energy Earth's stock and bonds?

Talking about the company’s stock, there are moments that investors who invest in this company will never forget. On 11 May 2017, the stock price opened at 4 Baht per share and hit the first floor at the end of that day. The next day the stock still continued to plummet to the second floor and closed at 1.98 Baht per share. Considering only these two days,  the stock lost about half of its value, so what happens to the company?

The explanation of this phenomenon is that the managers of the company wanted to borrow money to invest in other business. Therefore, they used the company’s shares as a collateral for borrowing money from the broker. However, things went wrong when the stock price dropped and the value of collateral assets decrease. As a result, The managers were forced to sell the stock at every price in order to pay back the broker. Around 339 million stocks, 9.59 % of total share, were sold on those two days, which created a huge loss for many investors.

Talking about bonds, Earth Energy Company also has problems with bondholder too. On 7 June 2017, the company was unable to pay back a 40-million bill of exchange (BE), which is a short-term borrowing money, and the company announced that it will default in other debts too because of a lack of liquidity. After the publication of this news, the stocks dropped 30 percent. To understand more about the financial status of the business, let’s look at the company assets and liabilities.

Liabilities of  Earth Energy Company at the 1st Quarter 2017

1) Bill of exchange 2.38 billion Baht

2) Trust receipt 5.31 billion Baht

3) Packing credit 4.79 billion Baht

4) Bank loan 4.21 billion Baht

5) Corporate bond 5.48 billion Baht

Assets of Earth Energy Company at the 1st Quarter 2017

1) Cash 1.24 billion Baht
2) Account receivable 5.73 billion Baht
3) Inventory 1.98 billion Baht
4) Prepaid expenses 8.46 billion Baht

5) Land, Building and Equipment 1.82 billion Baht

6) Rights in mining 8.21 billion Baht

7) Prepaid money for merchandise rights (เงินจองสิทธิในการซื้อสินค้า)  7.61 billion Baht

Retrieved from www.thansettakij.com 

As you can see, the company has total liabilities of 23 billion baht, which 14,923 of them are debts that due in a year. On the on the hand, looking at company’s assets. you can see that the company has around 35 billion in total assets. However, most of the assets are an intangible asset which is not able to pay the debts and it has only 1.2 billion in cash. That is that reason why the company has liquidation problems.  

What happened to Earth's stock and bonds?

After the company defaulted on 40 million bills of exchange,  Tris rating, which is a rating agency for corporate bond, reduced the bond rating of the company from BBB- to D. Moreover, debtholders of the company, the bank, temporarily limited amount of money that will lend to the company and commanded the company to reduce amount of bank loan debt to only 5 billion Baht because they found that the company spend the borrowed money on buying stocks, but not investing for business expansion like the company had claimed. On 15 June 2017, the company announced to SEC that it was unable to pay back the debt of financial institutions. Moreover, the debtholders of the company called back bond’s principal that issued earlier. These caused the company has even more problem with liquidity.

Before the company announced bad news on 15 June 2017, at that time the stock price was already dropped and stayed at a low price. Some people believe that the stock will be rebound back to the normal state; as a result, they keep buying the stocks and market volume of the company on that day was so vibrant. However, on 26 June 2017, the Earth Energy stocks were suspended from trading by SEC which made many investors who had bought this stock earlier cannot trade since that time. The reason that SEC decided to suspend the stock is that because the company did not provide sufficient evidence and transparent reporting.

Who lost money or are likely to lose money?

In this section, we will try to explore how this event affects and creates a negative impact on stakeholders. These following are stakeholders who directly get an impact from this event:

Debt holders: Earth has debts with 4 banks including Krungthai Bank (12 billion baht), Kasikorn Bank (3.8 billion baht), Krungsri Bank (1.2 billion baht) and Exim Bank (350 million baht). Moreover, Earth has bill exchanges and bonds that scheduled to be paid in 2019 worth 2.2 billion  Baht and worth 5,500 million Baht respectively. If the company went bankrupt, all of these debt holders will receive nothing and the loan will be Non-Performing Loan (NPL)

Account payable: Many companies that doing business with Earth Energy Company also receive impact from this event. if the company goes bankrupt, those companies will not receive their debt back.  

Stockholder: An interesting fact about stockholder is that 5 days before the stock suspension many investors believe that the company still doing fine and the stock price will be rebound back. Only in those 5 days, the total transaction of the stocks was about 9.3 billion Baht which was almost twice of the total number of share. Moreover, the number of investors who invest in this stock increase dramatically. To illustrate before this event there are only about 7,200 people holding this stock, but on that day there are about 18,000 people owning the stocks. After SEC suspended the stock investors were trapped with the stock and cannot liquify their money.

What types of risks are realized?

Asymmetric information

Adverse selection: investor who invests in this company face this risk because the company financial status is not transparent. As a result, this can mislead investors in evaluating the company value and risks.

Moral hazard: this type of risk occurs after transaction. After financial institutions lending money to the company, it spends the money to buy stocks instead of investing in business expansion like it had claimed.

Credit risk

As you can see when the company defaulted on 40 million B/E. The tris rating reduces the company’s bond grade from BBB- to D which means that the company has a higher risk of default.

Liquidity risk

In the company perspective, the problem occurs because company cannot pay their short-term debt due to not enough current assets.

In the investors perspective, when SEC suspend stocks of Earth company, investors are trapped and cannot trade or transform the stocks into cash.

What are the responses of SEC?

The main roles of Securities Exchange Commission (SEC) are to make sure that every company follows the regulations in the stock market and provides sufficient and accurate data for investors. Also, SEC has a role to protect investors from fraud and to make market as efficient as much as possible. In this paragraph, we will look at SEC actions toward the defaults on bill of exchange and other debts of Earth Energy company.

On 7 June 2017, after the Earth Energy Company defaulted on the first 40 - million bill of exchange due to lack of liquidity, the SEC commanded the company to report whether the default of the debt affect company's operation or not.

On 15  June 2017, the company announced that it had defaulted on institutional debts because of a lack of liquidity. This was a crucial sign that the company was having really big financial problems. As a result, to protect investors from more losses, SEC decided to suspend the stock trading (SP).

On 23 June 2017, SEC demanded company to have a special audit from an external auditing company in order to find out whether the company has intangible assets like it had claimed or not.

On 21 July 2017, the company asked SEC to prolonged the process of sending a special audit report to SEC because the company was not ready. However, SEC rejected the request and forced the company to send the report as soon as possible.

On 24 July 2017, the Earth Energy company requested for business reorganization,  a process to compromise debts with debt holders to liquify the business cash flow. This request shocked most of the investors because at that time on its balance sheet, it had 10.6 billion Baht assets more than liabilities. However, the company claimed an unprecedented increase in liabilities of 26 billion Baht, which is about  1.21 times increase in total liabilities. An increase in the liabilities dramatically affected the company financial status and investment decision of investors, so SEC forced the company to clarify where these debts come from. The company reported that the debts were due to the company being sued by partnering companies.

Retrieved from www.thansettakij.com 

To conclude, at the present time the Earth Energy Company is in the process of business reorganization which stakeholders try to find a solution for this problem.

Reference

• Retrieved from http://www.thansettakij.com/content/164488
• Retrieved from https://www.prachachat.net/finance/news-21597
• Retrieved from http://longtunman.com/1483
• Energy Earth Public Company Limited. (n.d.). Retrieved from http://earth-th.listedcompany.com/company_business.html
• The Stock Exchange of Thailand - Companies/Securities in Focus. (n.d.). Retrieved from https://www.set.or.th/set/companyprofile.do?symbol=EARTH&language=en&country=TH