China’s First Bond Defaulter Gets Guarantee From Bad Bank

Shanghai Chaori Solar Energy Science & Technology Co., the first company to default in China’s onshore bond market, got a guarantee to help make repayments from a state-backed fund that buys bad debt.

China Great Wall Asset Management Corp., one of the four so-called bad banks that the government set up in 1999, will guarantee as much as 788 million yuan ($128.4 million) on the solar-panel maker’s 1 billion yuan of defaulted notes, it said in a statement posted to the Shenzhen Stock Exchange website yesterday. Shanghai Jiu Yang Investment Management Center, one of the nine investors to restructure Chaori, will provide 92 million yuan, it said in a separate filing.

The backing is part of Chaori’s restructuring plan that comes as Premier Li Keqiang seeks to avert sharper economic slowing and prevent financial risks from spreading. Shanghai marked a corporate-bankruptcy milestone in June when a court accepted a reorganization application for Chaori. The company paid 4 million yuan of an 89.8 million yuan coupon due in March on the 2017 bonds, and must repay the securities in full within six months of any court approval of the restructuring plan.

“The plan means investors can get all the money back,” according to Lei Haiqiang, a lawyer at the law firm Beijing Ya Ao who said he bought 2,160 Chaori bonds at a price of around 77 yuan a piece on March 1. “I’m quite happy with the plan, and am sure it will be approved by bondholders.”

Payment Plan

With interest included, Chaori bonds are valued at about 111.64 yuan per note, the manufacturer said in a separate exchange statement yesterday, which was dated Sept. 30 as were the other filings. Chaori will first repay 3.06 yuan on each security from a reserve drawn from collateral. The 108.58 yuan gap will be treated as “common debt,” for which the company will repay 100 percent for portions below 200,000 yuan and only 20 percent for holdings above 200,000 yuan, it said. The shortfall would be covered by the guarantees.

China set up Great Wall Asset, Huarong Asset Management Co., China Cinda Asset Management Co. and China Orient Asset Management Corp. in 1999 to clean up a financial system on the brink of bankruptcy after decades of government-directed lending to unprofitable enterprises.

While the guarantees are welcome from investors’ perspective, the fact that Great Wall Asset draws on taxpayer funds means that its “repaying one private company’s debt is unfair,” Lei said.

Equity Dilution

An official who wouldn’t be identified in the press department at Great Wall Asset declined to comment when reached by phone today. There was no immediate reply to an e-mailed request for comment.

In an equity dilution plan, Chaori will issue 19.9 new shares for every 10 existing shares, according to the statement. A consortium of nine new investors, led by Jiangsu Golden Concord, the mainland China arm of Hong Kong-based Golden Concord Holdings Ltd., will provide 1.46 billion yuan to Chaori to repay debt, in turn for 1.68 billion shares from existing shareholders, or 66.6 percent in the new equity structure, according to the statement.

The plan will become effective upon agreement from creditors and the local court ruling. If the plan fails, Chaori will be liquidated, it said. In that scenario, Chaori’s existing assets can cover, at maximum, only 3.95 percent of its outstanding “common debt,” which includes most parts of debt owed to bondholders, according to the statement.

Under the business reorganization plan, Jiangsu Golden Concord will take over the management. It pledged to make a net profit for this year and to be relisted in 2015.

With Chaori investors facing the prospect of getting back all their money, it looks increasingly certain there won’t be any real defaults this year on similar publicly issued notes, according to Sun Binbin, a bond analyst at China Merchants Securities Co.

— With assistance by Judy Chen

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