China’s Bright Dairy is set to become Synlait Milk’s majority shareholder as part of a “critical” NZ$271.8m ($166.8m) equity raise by the struggling New Zealand business.

Bright Dairy, the dairy and infant-formula maker’s largest shareholder with 39%, will hold 65.3% in the Wellington-based company after subscribing to the offering, which needs to be approved at a September meeting.

Synlait, which has already recently received a NZ$130m bailout loan from Bright Dairy, warned the business is likely to fail if the additional capital is not secured. A commitment from The A2 Milk Co. to subscribe to the equity offering, part of an agreement reached last week to end a long-running contractual and price dispute, would also not materialise.

A2 Milk would be issued with NZ$32.8m of Synlait’s shares under a placement agreement and would remain the second-largest shareholder with 19.8%. Bright Dairy would subscribe to NZ$185m.

Reaching an agreement with banking creditors to refinance debt would also be another critical step in securing Synlait’s future as a viable business. Chairman George Adams warned in a stock-exchange filing today (20 August) the banks could well choose to call in the loans.

Adams said: “This equity raise is critical for Synlait’s future. If the resolutions are not passed, it’s likely Synlait would need to cease trading and initiate a formal insolvency process.

“The equity raise will only complete if it does so concurrently with the refinancing of Synlait’s bank facilities.”

The chairman added the equity raise, last week’s settlement with A2 Milk and the debt refinancing are all interrelated and need to be completed together, “or not at all”.

Those three components are expected to be finalised on 1 October, while a shareholder meeting to approve the equity capital is slated for 18 September.

Synlait has debt obligations coming due in October and suggested that in the event of a default, “existing banks may seek to initiate a formal insolvency process, such as appointing a receiver”.

It added: “All tranches of the existing bank facilities (other than tranches with a combined limit of approximately $62 million) are due to mature on 1 October 2024 and all amounts outstanding under those tranches must be repaid by Synlait on or before that date if not refinanced.”

Synlait described the equity raise as being “significant” given it represents about three times the company’s market capitalisation.

“Raising that amount of new equity capital is highly challenging in any circumstance but is particularly so for Synlait given its current over-geared financial position and recent financial underperformance,” it said.