Defaulting Chinese firms resort to tricks
Missing corporate stamps, shuffled assets and disappearing
executives have become the hallmarks of debt distress in China. Investors are
starting to lose patience.
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Bloomberg
24 May 2016
Missing corporate stamps, shuffled assets and disappearing executives have become the hallmarks of debt distress in China. Investors are starting to lose patience.
China Shanshui Cement Group said this month it could not distribute interest without its company seal, only for the underwriter to report payment later, saying the stamp is not needed.
Shenyang City Utility Group said it could not publish a repayment statement as the holder of its company stamp was travelling.
China City Construction Holding Group bonds slumped to 79 yuan out of 100 yuan face value on May 6 after its controlling shareholder changed.
Fosun International was among the issuers to report lost contact with executives. A lack of transparency and protections in bond documentation are adding to the angst among investors in China, where a record 10 firms have failed to make payments this year amid the weakest economic growth in a quarter-century.
This has prompted the authorities to tighten regulation and scrutinise underwriters' due diligence work.
"The bizarre defaults may discourage foreign investors from entering China's corporate bond market," said Fitch Ratings senior analyst Wang Ying in Shanghai. "The internal corporate management of some companies is in chaos. It's a typical phenomenon at an early stage of a bond market."
Fosun's US$400 million (S$552 million) of 6.875 per cent bonds, due in 2020, slumped by a record on the day after Caixin magazine reported in December that its chairman Guo Guangchang had gone missing. The bonds have since recovered to 104.5 cents on the dollar.
China's domestic high-yield bonds last month have suffered the worst sell-off since December 2014, with the yield spread on three-year AA-rated notes - considered junk in the country - over government bonds widening by 42 basis points.
Electrical equipment manufacturer Baoding Tianwei Baobian Electric transferred loss-making alternative-energy assets to shareholder Baoding Tianwei Group in 2013, hurting the parent's repayment ability, according to a report from China International Capital in April last year. The group defaulted for a third time last month.
"We have always thought that China onshore investors have less protection compared with their offshore peers," said Mr Edmund Goh, a Kuala Lumpur-based investment manager at Aberdeen Asset Management. "We do not want to be caught in a situation like Baoding Tianwei, whereby assets were transferred out of the company without needing bondholders' approval."
China City Construction described itself as a large state- owned enterprise in its Dim Sum bond prospectus in 2014.
Then, in a statement in April, the company said its owner until recently, China City Development Academy, is actually a civil society organisation. In the same statement, the firm said a new shareholder, Huinong Fund, holds 99 per cent of its shares. China City Construction spokesman Yuan Qing said in response to Bloomberg inquiries that the company is currently a private-sector firm with a 1 per cent stake held by a state-owned enterprise.