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Payment in kind of a bad way

By Taipan
22 Nov 2018

Payment-in-kind has taken a turn for the worse in Asia’s bond market, with flight tickets and pork being offered instead of cash. Aviophobic vegetarians are up in arms.

Qianhai Air & Shipping Exchange, a subsidiary of China’s HNA Group, has apparently misunderstood the meaning of ‘bond coupon’ — it is planning to repay its bondholders with coupons for flight tickets instead of cash. This follows the news that Chuying Agro-Pastoral Group, a pork producer, will give its own investors ham or ‘pork gift packets’ instead of interest payments.

It seems unlikely that investors will have been happy with the idea of taking flight coupons or hock ham instead of hard currency, but perhaps this is simply the latest market innovation.

Companies could use this novel solution en masse, reducing their refinancing risk and creating a whole new customer base in one fell swoop. Phone companies would redefine the meaning of a ‘call option’. Stair-makers would offer investors a ‘step-up’. What about covenant packages? Buy church bonds if you want those delivered to your door.

The problem with all this is that some companies will have more luck than others. De La Rue, which prints money, will be embraced by investors. Aqualia, which treats sewage, will probably not.

Since this situation is frightfully unfair, it might be best for issuers to adopt another strategy. Rather than a company giving its product to bondholders in lieu of cash, it could sell the product and use the cash to pay them back money instead. We haven’t worked out the details of this innovative strategy yet, but we’ll let you know when we do.

In fairness, Chuying Agro-Pastoral has said the bulk of its bond will be repaid in cash. Investors could be forgiven for wondering if the company is telling porkies.

By Taipan
22 Nov 2018