Red Flags Raised Again as Zoomlion Leads Junk Drop: China Credit

China’s second-biggest construction equipment maker fell the most among Asian dollar-denominated junk bonds amid corporate governance concerns in the nation.

Notes sold by Zoomlion Heavy Industry Science & Technology Co. have lost 4 percent this year, the biggest drop among similar securities tracked by Bank of America Merrill Lynch indexes, as the company denied a media report that it had faked sales. Dollar debt in Asia has gained 0.18 percent in February, while globally notes in the currency returned 0.21 percent.

Moody’s Investors Service warned of “red flags” on the accounting of 61 firms in July 2011 and forestry operator Sino-Forest Corp. filed for bankruptcy protection in March last year after accusations it had overstated its plantations. Non-investment-grade issuance from Chinese businesses boosted dollar debt sales in the Asia-Pacific to a monthly record of $37.3 billion in January, raising the stakes for global investors.

“It will definitely be a short-term negative,” said Suanjin Tan, a Singapore-based Asian fixed income portfolio manager at BlackRock Inc., which had $3.79 trillion of assets under management as of Dec. 31. “This should also serve to distinguish the companies that are transparent from their peers that are not.”

Zoomlion’s (1157) December 2022 notes, which were priced at 99.08 cents on the dollar on Dec. 13, sunk to 94.1 cents on Feb. 4, Bloomberg-compiled prices show. The bonds were at 94.4 cents yesterday, according to the data.

Fraud Denial

The manufacturer, based in Changsha in the south-central province of Hunan, said “no accounting fraud has ever been committed” and that claims of fictitious sales were “false, groundless and misleading,” in a Feb. 4 filing. That came after the Shanghai-based National Business Daily reported that it received documents showing the company made inaccurate revenue statements.

“We certainly feel that current prices do not reflect the fair value of Zoomlion bonds,” according to a statement from Shen Ke, secretary to the company’s board of directors, e-mailed by Wonderful Sky Financial Group, the financial public relations consultant for the company in Hong Kong, in response to questions about the securities. “In general bonds have less liquidity than equity stocks, which make them a bit more susceptible to temporary significant price fluctuations sometimes caused by rather small trades, and when market instincts over-react to what in this case was certain misinformation.”

‘Digestion Problems’

Securities sold by Soho China Ltd. (410), developer of the Sanlitun SOHO area in Beijing, fell after the company denied a report in the Beijing Times that linked it to money laundering, according to data compiled by Bloomberg. Soho’s $600 million of 2017 notes, which priced at par in November, tumbled to 95.2 cents on the dollar on Feb. 7, Bloomberg-compiled data show. The securities were at 97.4 cents yesterday.

“We emphasize again that any accusations about us colluding in money laundering or kickbacks are rumors,” Soho Chief Executive Officer Zhang Xin said on Feb. 6 in a statement on her microblog, confirmed by the company.

“The issue about corporate governance with respect to Chinese companies is not new,” said Desmond Soon, a Singapore-based senior portfolio manager at Western Asset Management, which manages $461.9 billion of assets globally as of Dec. 31. “In part, price actions on these bonds are severe because we have seen so much new issuance and there were digestion problems to begin with.”

Companies in China and Hong Kong have sold $11.85 billion of dollar bonds this year, the most in any similar period in previous years, according to Bloomberg-compiled data.

Premiums Rise

The extra yield investors demand to buy dollar securities of Chinese companies rather than Treasuries has climbed 5 basis points this year, compared with the average 2 basis-point decrease in the spread on dollar bonds in the region, according to JPMorgan Chase & Co. indexes. The premium reached an 11-week high of 399 basis points on Feb. 5, up from a three-year low of 356 basis points on Jan. 7.

The world’s second-biggest economy accelerated for the first time in two years last quarter, pushing up sovereign bond yields and buoying the nation’s currency. Gross domestic product expanded 7.9 percent in the three months through December, up from 7.4 percent in the previous period.

The benchmark 10-year government bond yield climbed to a high for the year at 3.61 percent on Jan. 29 from as low as 3.24 percent on July 11. It was unchanged at 3.6 percent yesterday.

Bookkeeping Scrutiny

The yuan touched a 19-year high at 6.2124 on Jan. 14. The currency rose 0.04 percent to 6.2419 per dollar as of 9:53 a.m. in Shanghai, prices from the China Foreign Exchange Trade System show.

The cost of insuring China’s debt against non-payment with credit-default swap contracts has fallen 5 basis points to 64 this month, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. It is down from as high as 146 in June last year. The indexes typically fall as investor confidence improves and rise as it deteriorates.

Chinese companies’ bookkeeping came under greater scrutiny after Carson Block’s research firm Muddy Waters said Sino-Forest overstated profit margins in June 2011. The Moody’s “red flags” report came weeks later. Gary Lau, Hong Kong-based head of corporate finance at Moody’s, declined to comment on current corporate governance concerns in China.

‘Better Standards’

“I think investors should now have prepared for potential corporate governance issues among Chinese companies,” said Annisa Lee, a Hong Kong-based credit analyst at Nomura Holdings Inc. “That said, when it is a bull market, investors tend to ignore this factor and bonds will be priced tightly.”

Zoomlion is “very confident about the quality of our business performance and financial numbers,” according to the statement from Shen e-mailed by Wonderful Sky Financial Group. “Any future bond issue will definitely take into account performance of existing bonds, ultimately the market makes the judgment based on the company’s fundamental health—and on that again we are very confident.”

Chinese real estate developers Agile Property Holdings Ltd. (3383) and Longfor Properties Co. were among businesses mentioned in the Moody’s report in 2011 that have recently sold debt.

Agile, in which JPMorgan Chase & Co. owns a stake, paid 8.25 percent for a $700 million perpetual bond on Jan. 11, while Longfor sold $500 million of 10-year notes at 6.75 percent on Jan. 22. By comparison, Agile offered 9.875 percent in March for five-year debt and Longfor 6.875 percent for a seven-year note in October, according to Bloomberg-compiled data.

“These reports absolutely do impact conviction levels,” said Bryan Collins, a Hong Kong-based money manager at FIL Ltd., known as Fidelity Worldwide Investment. “At the end of the day, there’s some short-term pain for long-term gain. At least these reports encourage companies to be more open, more clear and for investors to insist on better standards.”

To contact the reporter on this story: Tanya Angerer in Singapore at tangerer@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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