China Firms Fleeing U.S. Listings Leave Bondholders in Dark

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The record pace of Chinese companies leaving U.S. exchanges is spurring concern among bondholders that transparency and corporate governance may worsen.

At least 25 Chinese companies listed in the U.S. are considering going private or have done so this year amid speculation they plan to list in China for higher valuations. The group includes international bond issuers such as Internet security service provider Qihoo 360 Technology Co. and data-center operator 21Vianet Group Inc. Baidu Inc., China’s largest search engine operator which also has global notes, has said it is interested in returning to the local stock market.

The trend threatens to make it more difficult for investors to assess financial risks at Chinese companies that have been listed in the U.S. and issued $33.6 billion of international bonds. Companies ditching their U.S. listings no longer have to file quarterly financial results, which debt investors rely on to gauge borrowers’ ability to pay off obligations.

“The implication of the privatization wave for bondholders is once the company is delisted, there is likely to be less financial disclosure on operations, debt and mergers and acquisition activities,” said Raymond Chia, the Singapore-based head of credit research for Asia ex-Japan at Schroder Investment Management Ltd. The firm oversaw $474 billion as of March 31. “This means that if the company does any acquisitions or profit warning, they are not required to file in the stock exchange anymore.”

21Vianet

Five U.S.-listed companies including Alibaba Group Holdings Ltd. and Xinyuan Real Estate Co. have offshore bonds outstanding. About 17 have convertible notes. Among those, three have received privatization offers: SouFun Holdings Ltd., China’s largest real-estate information website; real restate agency E-House China Holdings Ltd.; and budget hotel chain Homeinns Hotel Group.

21Vianet is among the Chinese companies considering delisting that have issued bonds. The Beijing-based firm got a $1.4 billion takeover bid in June from its chief executive officer. The company has two Dim Sum bonds: 2 billion yuan ($322 million) of 6.875 percent offshore yuan notes due 2017 and 264.3 million yuan of bonds due 2016.

While 21Vianet would still have to disclose certain financial ratios to bondholders even if it left the U.S., investors would get less information on its financial health, Henry Ng, credit analyst at Citic Securities International Co., wrote in a June 11 report.

Wider Implications

A phone operator at 21Vianet refused to connect to the investor relations department without a name. The company didn’t immediately reply to an e-mail seeking comment.

“Currently in the documents of most bonds issued overseas by Chinese companies, there is no clause to protect bondholders from privatization risks except change of control for shareholder change and M&A protection,” Chia of Schroder said.

Delisting may cause firms to alter business direction as management often teams up with other partners or private equity houses for the buyouts, according to Schroder’s Chia.

“Management strategy may change after privatization, which may not be in the interest of bondholders,” Chia said.

Stock market performance is another concern. China’s benchmark Shanghai Composite Index has tumbled 29 percent in the past three weeks, paring its surge over the prior twelve months. Any continued declines could tarnish the appeal of China listings. The slide has also prompted Chinese regulators to consider suspending initial public offerings.

“For the companies that just delisted, they need time to relist if they are seeking that route,” said Chia. ’’So during the time period, we face all the risks. And worse still, by the time they get their gig sorted, the IPO market may not be there anymore for them.’’

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