Markets

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.

Call it China's latest financial gambit. In a move that's becoming more common, equity funding, usually a boon for bondholders, is turning into a risk.

Yingde Gases Group Co. last week became the latest company to jolt creditor expectations after an equity injection morphed into a shareholder battle that's seen the firm's U.S. currency bonds plunge to 91 cents on the dollar from more than 100 cents in the space of seven days. The tussle also prompted S&P Global Ratings to downgrade Yingde four steps to B-, one level above the C category associated with imminent default. It summarized its decision thus:

A recent dispute among Yingde's shareholders over the change of management and a share placement to Originwater has led to imminent refinancing risk relating to Yingde's offshore loan.

Oddly enough, the trouble began as a positive sign. On Nov. 6, the largest manufacturer and supplier of industrial gases in mainland China said it had reached an agreement with Originwater Hong Kong Environmental Protection Co. to raise HK$1.2 billion ($155 million) by selling 378 million new shares at HK$3.20 a piece.

The transaction was welcome, considering Hong Kong-headquartered Yingde's ability to pay interest looked tight after slower manufacturing growth and industrial production in China dented sales.

Tight Liquidity
Yingde Gases' operating profit was only enough to cover 2.5 times its interest expense at the end of 2015, the lowest ratio since the company was listed
Source: Bloomberg

It would also increase Originwater's stake in Yingde to 20.2 percent from 4.2 percent, making it the biggest single investor.

Originwater then proceeded to relieve Yingde's previous No. 1 and No.  2 shareholders -- Zhongguo Sun and Zhao Xiangti -- from their executive duties at the company. As a result, Sun and Yingde's former chief operational officer, Trevor Strutt, published an open letter to shareholders claiming the reshuffle was decided at a board meeting that wasn't valid. Then on Dec. 18, Yingde announced it would issue 189 million shares, a 50 percent reduction, to Originwater instead.

Yes, It Is Your Problem
Holders of Yingde Gases' dollar bonds have been taken on a wild ride after the company's fundraising plans prompted a shareholder dispute
Source: Bloomberg

Before bondholders breathe a sigh of relief, however, they should remember this saga may not be over yet.

Twelve months ago, another similar Chinese shareholder battle was playing out. International noteholders caught up in that dispute were dealing with China Shanshui Cement Group Ltd.'s default on local securities that affected $500 million of offshore debentures.

It all started in much the same fashion, with Shanshui Cement's founder Zhang Bin tapping equity investors multiple times to replenish coffers until he suddenly realized he'd become a minority shareholder. The scuffle that ensued ended with him losing control, and a lot more to boot.

These Peking soap operas make for good bedtime reading but creditors should be wary. The number of bond defaults in Asia's biggest economy rocketed to 27 this year from just seven in 2015. Increasingly, companies are resorting to additional equity placements before they renege on debt. Chinese firms have made more multiple equity offerings in the past three years than in the previous seven.

If at First You Don't Succeed
Chinese companies are turning to additional share offerings to solve liquidity issues
Source: Bloomberg

For creditors, that would usually be good news. Raising money through equity makes balance sheets more solid and increases the odds of getting repaid.

But in China, things aren't always so straightforward. If that sort of funding strategy results in a shareholder spat, bondholders could find themselves quickly under water.

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

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net