9. Bank Notes, Bank Loan Payable, Private Loan and Short Term Loan Payable - Related Party

6 Months Ended

Jun. 30, 2012

9.	Bank Notes, Bank Loan Payable, Private Loan and Short Term Loan Payable – Related Party

Bank Notes Payable

The bank notes payable do not carry a stated interest rate, but carry a specific due date usually within six months. These notes are negotiable documents issued by financial institutions on the Company’s behalf to vendors. These notes can either be endorsed by the vendor to other third parties as payment, or prior to becoming due, they can factor these notes to other financial institutions. These notes are short-term in nature, as such; the Company does not calculate imputed interest with respect to them. These notes are collateralized by the Company’s restricted bank deposits. The Company has to maintain 100% of the balance of the bank notes payable to ensure future credit availability.

Bank and Private Loan Payable

Bank and private loans at June 30, 2012 and December 31, 2011 consisted of the following:

		2012		2011
To Credit Union
Interest at 6.10%, payable March 29, 2012	(a)	$	-	$	3,019,100
Interest at 13.12%, payable September 19, 2012	(b)		2,990,790		3,019,100
Interest at 7.93%, payable September 25, 2012	(c)		2,990,790		-
To Raiffeisen Bank International AG Beijing Branch
Interest at 7.93%, due by February 27, 2012	(e)		-		28,602,000
Interest at 8.78%, due varied from July to August, 2012	(f)		18,889,200		-
To a Private Loan
Interest at 10.50%, payable January 10, 2013	(d)		1,243,539		-
Total Short Term Bank Loans		$	26,114,319	$	34,640,200

(a)	On September 30, 2011, the Company received a RMB 19,000,000 ($3,019,100) short-term borrowing from Credit Union. The loan was a “working capital” loan that bears interest at 6.10% per annum and was repaid on March 23, 2012.

(b)

On September 22, 2011, the Company received a RMB 19,000,000 ($2,990,790, translated at June 30, 2012 exchange rate; $3,019,100 translated at December 31, 2011 exchange rate) short-term borrowing from Credit Union. The loan is a “working capital” loan that bears interest at 13.12% per annum and is due on September 19, 2012. The loan is secured by the equipment of Hongrong, a related party.

(c)	On March 26, 2012, the Company received a RMB 19,000,000 ($2,990,790) short-term borrowing from Credit Union. The loan is a “working capital” loan that bears interest at 7.93% per annum and is due on September 25, 2012. The loan is secured by the equipment of Hongri.

Total value of equipment secured for above mentioned bank loans is RMB 70,967,104 ($11,170,932).

(d)	On January 20, 2012, the Company received a RMB 7,900,000 ($1,243,539) short-term borrowing from a private lender. The loan bore interest of 10.50% per annum and is due on January 10, 2013.

(e)

On June 28, 2011, Hongri entered into a revolving loan agreement (the “Agreement”) with Raiffeisen Bank International AG Beijing Branch (“Raiffeisen”). The Agreement provides for a revolving credit facility in an aggregate principal amount of RMB 180,000,000 (approximately $28,602,000 translated at the rate of December 31, 2011) which used as working capital. Each borrowing could not exceed 180 days or days the Bank agreed during the Agreement period.

(f)

On August 24, 2011, Hongri deposited RMB 15,000,000 ($2,361,150) into Raiffeisen to execute the revolving loan agreement, which was recorded as restricted cash. On August 31, 2011, the Company received the first borrowing RMB 180,000,000 ($28,602,000) which was due by February 27, 2012. The Company repaid its outstanding balance as of February 24, 2012. Upon the repayment, the Company acquired the second borrowing in the total amount of RMB 180,000,000 from Raiffeisen Bank. The second borrowing was due by varied from July to August 2012. On June 27, 2012, the Company repaid RMB 60,000,000 ($9,444,600, translated at the rate of June 30, 2012). The remaining balance of RMB 120,000,000 ($18,889,200) has been fully repaid as of August 9, 2012 (RMB 50,000,000 repaid in July and RMB 70,000,000 repaid in up through August 9).

Pursuant to the Agreement, borrowings will bear interest at 130% of the benchmark rates of similar loans published by the People’s Bank of China. Based on the current benchmark interest rate for a six months loan, the first borrowing bears the interest of 7.93% and the second borrowing bears the interest of 8.78%. The interest is calculated on the daily basis and shall be paid on the 20th of the last month of each quarter. The borrowings are secured substantially by the following: all machinery and equipment of Hongri; inventories of Hongri and Hongrong with a value of not less than RMB 75,000,000 (approximately $11,805,750); a security deposit of RMB 15,000,000 (approximately $2,361,150) into the Raiffeisen bank as a collateral; corporate guaranty from Hebei Wu’an Yuanbaoshan Industry Group Co., Ltd. (“YBS group”), a majority shareholder of Hongri; and personal guaranty from Mr. Beifang Liu, Chairman of YBS group and Mr. Shenghong Liu, Chairman and Chief Executive Officer of the Company.

Short Term Loan Payable – Related Party

During 2011, the Company borrowed RMB 11,000,000 from a related party, Mr. Maisheng Liu, a senior manager of the Company. During the six months ended June 30, 2012, the Company borrowed additional RMB 11,860,000 ($1,876,489) from Mr. Maisheng Liu and returned total of RMB 22,860,000 ($3,616,909) to Mr. Liu.

On June 28, 2012, the Company borrowed RMB 1,000,000 ($157,410) from Mr. Beifang Liu, director of the Company, and RMB 4,000,000 ($629,640) from Mr. Maisheng Liu, brother of the CEO of the Company. These payables were interest free and due on demand.

The weighted average short term loan balance consisting of financial institution and private loans and Binchang Liu, Beifang Liu and Maisheng Liu loans was $18,174,535 and $4,776,468 as of June 30, 2012 and 2011, , respectively. The weighted average interest rate for short term loan was 8.81% and 8.29% for the six months ended June 30, 2012 and 2011, respectively.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References+ Details

China Industrial Steel Inc. 10-Q/A