Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

The much-touted reform of state-owned companies in China is really happening. Before investors celebrate, however, they should take a look at their portfolios. Anyone holding bonds of one of the companies targeted may have reason to cringe.

That's what those who bought dollar bonds of Sinochem are probably doing right now. The news that China is planning to merge the company with its weaker peer ChemChina, reported by Bloomberg News Friday, increases the odds of a downgrade for Sinochem.

The best outcome debt investors can hope for is that the deal is structured in a way that triggers a change of control clause included in some Sinochem dollar bonds, which would allow them to demand their money back immediately.

Sinochem International, the group's publicly traded arm, reported net income of 480.5 million yuan ($71 million) in 2015, while ChemChina lost 7.5 billion yuan. In a recent Chinese bond prospectus, the latter blamed the negative results partly on the fact that it has incorporated a number of unprofitable state-owned companies over the past decade. In short, profitable Sinochem is taking over a money-losing dumping ground for bad government-controlled enterprises.

Levitate Me
Sinochem is getting the short-end of the stick as it takes on an unprofitable, embattled state-owned peer
Source: Bloomberg

Somebody always wins where others lose. In this case, investors in the bonds of ChemChina subsidiary National Bluestar can start popping the champagne. Even though some are protected against a takeover by the same change of control clause as in Sinochem's dollar bonds, they're less likely to trigger it. While Sinochem risks being downgraded from its current A3 level by Moody's, Bluestar would probably get a lift from its Baa2 grade, two below its peer.

Banking on Debt
ChemChina doesn't have enough short-term assets to meet its liabilities due within a year, unlike Sinochem
Source: Bloomberg; company filings

For bankers working on ChemChina's acquisition of Syngenta, the merger may be good news too, at least from a financial perspective. Caixin reported earlier this week that China Construction Bank and China Merchants Bank had pulled out from the consortium of lenders financing the all-cash deal. About $15 billion in funds needed to complete the $43 billion transaction is still not in place, the Chinese online magazine said earlier.

Show Me the Money
Syngenta shares' discount to ChemChina's offer price has been narrowing, but there have been jitters
Source: Bloomberg
Note: Based on discount of USD value of Syngenta shares relative to $465 offer price plus 5 Franc special dividend, converted into U.S. dollars at daily rates.

Those concerns have helped drive Syngenta shares down to their biggest discount to ChemChina's offer price since the deal was cleared by the U.S. foreign-investment watchdog in August, according to Gadfly's calculations. Adding Sinochem's balance sheet to ChemChina's ought to increase the odds of the financing being finalized.

That suggests one more group of investors who should be looking askance at this deal. Sinochem's International's Shanghai-traded shares rose as much as 10 percent Friday, helped no doubt by the prospect that the company will have claims on a much larger enterprise. (The merger would also reduce competition and support prices.)

But China's SOE reforms haven't always turned out so well for investors, and in this case ordinary shareholders are being brought into a group that appears to need an infusion of cash to complete its big European takeover. They shouldn't be surprised if Sinochem winds up holding out the begging bowl for them to contribute.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Christopher Langner in Singapore at
David Fickling in Sydney at

To contact the editor responsible for this story:
Matthew Brooker at