Lost Seals And Other Excuses Used by Defaulting Chinese Firms

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A Look at China's Unusual Default Excuses
  • ‘Bizarre defaults may discourage foreign investors:’ Fitch
  • Missing stamps, shuffled assets among ‘erratic’ behavior

Missing corporate stamps, shuffled assets and disappearing executives have become the hallmarks of debt distress in China. Investors are starting to lose patience.

QuickTake China’s Debt Bomb

China Shanshui Cement Group Ltd. said this month it couldn’t distribute interest without its company seal, only for the underwriter to report payment later saying the stamp isn’t needed. Shenyang City Utility Group Co. said it couldn’t publish a repayment statement as the holder of its chop was traveling. China City Construction Holding Group Co.’s bonds slumped to 79 yuan out of 100 yuan face value on May 6 after its controlling shareholder changed. Fosun International Ltd. was among 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 companies have failed to make payments this year amid the weakest economic growth in a quarter century. This has prompted authorities to tighten regulation and scrutinize underwriters’ due diligence work.  

“The bizarre defaults may discourage foreign investors from entering China’s corporate bond market,” said Wang Ying, a senior analyst at Fitch Ratings 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 $400 million of 6.875 percent bonds due in 2020 slumped by a record on the day after Caixin magazine reported in December that Chairman Guo Guangchang had gone missing. The bonds have since recovered to 104.5 cents on the dollar. Future Land Development Holdings Ltd. said in January that its Chairman Wang Zhenhua was being investigated by Changzhou city authorities. Its 10.25 percent 2019 dollar notes plunged by a record the next trading day and have risen to 109 cents. Neither Fosun nor Future Land have defaulted on their debentures.

China Shanshui first defaulted on its onshore notes in November as a shareholder tussle stymied financing. Shenyang City Utility, a local government financing vehicle in the capital of the northeastern province of Liaoning, said on April 28 it couldn’t publish bond repayment statement in time because a traveling employee was unable to chop the company stamp on the document. Chinese companies need seals to institute management changes so they can be registered with the government.

The company hasn’t defaulted on its notes. Two calls to China Shanshui’s investor relations department went unanswered. Two calls to Baoding Tianwei Group and Shenyang City Utility Group’s general lines also went unanswered.

Bond Selloff

China’s domestic high-yield bonds suffered the worst selloff since December 2014 last month 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 Co. transferred loss-making alternative-energy assets to shareholder Baoding Tianwei Group in 2013, hurting the parent’s repayment ability, according to report from China International Capital Corp. dated April 2015. The group defaulted for a third time last month.

“We have always thought that China onshore investors have lesser protection compared to their offshore peers,” said 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.” 

State Owned?

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 organization. In the same statement, the firm said a new shareholder Huinong Fund holds 99 percent of its shares. China Lianhe Credit Rating Co. said the company had failed to disclose the shareholder change promptly. The company hasn’t defaulted on its notes.

China City Construction spokesman Yuan Qing said in response to Bloomberg inquiries that the company is currently a private-sector firm with 1 percent stake held by a state-owned enterprise. It will redeem its 2.5 billion yuan ($382 million) offshore yuan bonds at 101 yuan for every 100 yuan of principal on June 20 via internal funds from both onshore and offshore operations, he said.

“The erratic bond defaults have scared investors,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. “They don’t know where to look for the next one to default. You can’t find the answers in companies’ financial books. Those defaulted didn’t necessarily have the worst financials. ”

— With assistance by Lianting Tu, Molly Wei, and Judy Chen

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