“[It] contains exaggerations.”
That’s what Guosen Securities (China’s eighth-largest investment bank) had to say when asked about FT’s assertion that the investment bank’s Hong Kong affiliate has defaulted on a dim sum bond. Apparently, an affiliated SPV issued the debt back in 2014 and according to Bank of New York Mellon (the offering’s trustee), Guosen HK is in violation of some part of the bond’s keepwell agreement.
One of the provisions “is not in full force and effect, which constitutes an Event of Default”, reads a document seen by FT, who notes that this would mark “the first debt breach by a state-owned enterprise in China’s offshore market in nearly two decades.”
“The technical default by Guosen’s Hong Kong affiliate puts at risk a Rmb38m ($5.9m) coupon payment due April 24 on Rmb1.2bn in dim sum bonds sold in 2014,” FT continues. “Missing that payment would set a precedent for the offshore units of Chinese SOEs, whose creditors widely assume the onshore parent will always stand behind its affiliates.”
Needless to say, this comes at a particularly sensitive time. Defaults in China have been mounting over the past 12 months as the decelerating economy conspires with the country’s massive debt burden to push all but the healthiest companies towards the precipice. SOEs are especially problematic and how Beijing handles a sweeping effort to restructure insolvent state-owned firms will ultimately determine whether investors’ previously unshakable faith in China’s unwillingness to allow SOE defaults was misplaced.
“After years in which investors reliably assumed that China’s government would not permit any corporate default, missed payments have become more common in both the onshore and offshore bond markets, but SOE defaults remain rare,” FT goes on to note, before adding that “neither an SOE nor any Chinese financial institution has defaulted since the collapse of Guangdong International Trust and Investment in 1999.”
On a technical level at least, that appears to have changed this month.
“The keepwell deed says that the onshore parent company and the unit will undertake to have a consolidated net worth of at least $1 at all times and ‘have sufficient liquidity to ensure timely payment’ on any amounts payable on the securities, according to the offering circular,” Bloomberg wrote today.
Although keepwells on dim sum bonds were a notoriously shaky setup from the very beginning, investors still viewed the agreements as tantamount to guarantees – that, frankly, was “dim” dumb (if you will). “Given the strategic importance of the guarantor to the parent, we believe Guosen Securities (onshore) will try its best to ensure the guarantor’s (offshore) liquidity to service its outstanding bond and compliance to the bond’s terms and conditions,” Ross Lee, credit analyst at Bank of China Hong Kong Ltd., said in a report out earlier this week.
In any event, Guosen has released a statement that reads like any other denial you’d expect out of China when something bad happens. “Guosen Securities (Overseas) says the keepwell deed attached to the 1.2b yuan 6.4% bonds due 2017 continues to be in full force and effect.”
Or, as the CSRC said in January when asked about reports that then-chief Xiao Gang tried to resign:”this information does not conform to the facts.”
We’ll see, on April 24 when the coupon comes due, what the “facts” here really are. “As trustee, BNY Mellon has received a clarification notice from Guosen which has been distributed to bondholders,” BNY Mellon would later say. “That notice seeks to correct statements set out in earlier communications from Guosen.”
We can only hope that no one at Guosen decides to go the way of Dongbei Special Steel Group Chairman Yang Hua who hung himself just days before the company was set to miss a principal and interest payment.
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Bonus: Moody’s on dim sum keepwells, ca. 2014
Moody’s Investors Service says that the over $12 billion of bonds issued by the offshore subsidiaries of China-incorporated companies and supported by keepwell deeds require careful consideration on a case-by-case basis.
“Bonds with keepwell agreements used to enhance their credit quality carry different risks that need to be individually assessed because of their considerable structural complexity,” says Gary Lau, a Managing Director for Moody’s Corporate Finance Group.
“Keepwell deeds are not guarantees and are subject to much greater legal and regulatory uncertainty than compared to guarantees. In particular, capital control laws in China heighten the risk that timely payments will not be made, even if keepwell deeds exist,” adds Lau.
“As a result, a one-size-fits-all approach to analyzing such structures does not offer sufficient insights to risk.”
Moody’s analysis of keepwell agreements in China is contained in its just-released report titled “Chinese Corporates: FAQs on Credit-Support Structures in China Using Keepwell Agreements: An Update”.
“Treating all keepwell structures as having similar effect, for example, by automatically rating debt at or near the support provider’s rating is certainly a simpler approach than our careful analysis of each transaction,” says Lau.
“However, such an approach does not properly reflect the structural and other risks involved and therefore does not provide adequate insights to investors,” adds Lau.
“Consequently, our analysis focuses on understanding the standalone credit profile of the debt issuer, the benefits of the credit-support structure and the economic and other incentives of the support provider to ensure full and timely payment to bondholders if required.”
Nonetheless, Moody’s report says because keepwell agreements are an important signal of a parent’s willingness to provide support to its offshore subsidiary, the debt issuer’s rating is likely to be higher than it would be if its parent company did not provide a keepwell deed.
Moody’s has provided ratings to bonds supported by keepwell deeds from 11 China-related issuers, totaling $12.5 billion. Of the 11, 10 have been rated one notch below the ultimate parent and support provider .
via Zero Hedge http://ift.tt/1SASRAI Tyler Durden