China bond investors deserve better treatment
Do investors matter in China’s bond market? Not much, judging by a recent series of bondholder meetings. HNA Group Co and Gemdale are the latest companies to push their luck. It is time for regulators to push back.
Spare a thought for China’s domestic bond investor base. While most bondholder meetings in the Chinese onshore market are still being held for normal reasons, such as asking for approval to change a use of proceeds, investors are increasingly being forced to contend with brazen tactics by issuers.
HNA Group Co held a meeting at 8pm on April 14 to discuss various changes to its bond documentation ─ but only publicly announced the meeting at 9pm on the same day. It may strike you that announcing a meeting one hour after it starts is odd, but that’s just old-fashioned thinking. The new breed of issuer takes things ever further.
Gemdale has offered perhaps the silliest example of a Chinese bond issuer trying to get around the rules. China’s domestic market allows issuers to adjust the coupons of their bonds by any amount before a put option comes due. But in Gemdale’s case, the bond documentation promised the coupon would be adjusted upwards.
Bankers working on the deal, remembering the basic principles of arithmetic, came up with an ingenious way around the bond documentation: 'they can add to the coupon, they’ll just add a minus number!' This stroke of mathematical genius allowed Gemdale to cut the coupon on its Rmb1bn three year non-put two bond from 5.29% to 1.5%.
Other issuers have tried to bypass clearing houses or stock exchanges to make their public bonds effectively private. Zhongrong Xinda Group Co, primarily a coal company, passed a proposal to pay the annual coupon of a Rmb1.6bn ($226m) 7.5% five year note privately in a March investor meeting. The move allows the issuer to directly negotiate with the investors about when and how much it pays, meaning it will no longer be held accountable to make public any payment – or non-payment.
Clothing and textile firm Shandong Ruyi Technology quickly followed suit, opting to privately repay a Rmb1bn 7.5% medium-term note, a move that bankers told GlobalCapital was a way to avoid a public default. Ruyi’s investors also agreed, unanimously, that the issuer’s failure to make an interest payment on time would not constitute a default.
HNA’s bondholder meeting last week was even more controversial. The issuer, a conglomerate that has experienced liquidity problems for a few years, did not just ask investors to vote on whether it could extend a bond’s maturity by one year. It also asked them to vote on the legality of the meeting itself.
Bondholder meetings should require notice of at least 30 days, but HNA gave notice on the same day. Some investors, who were not notified until 30 minutes before they needed to sign up to attend, did not have time to prepare documents with the official stamp to participate and vote in the meeting. Only 32 investors, with 90% voting rights, made it. Twenty-nine of them, perturbed by the hasty arrangement and proposals, did not back HNA’s plan, but it still passed, with the backing of legal opinion offered by a Beijing firm.
No regulator has publicly condemned HNA's actions in the week following the bondholder meeting fiasco. One onshore banker called the meeting “a joke”, but a handful of others at large state-owned banks have shown an understanding of regulators’ position. Since the Chinese central government has promised to support companies hit hard by the Covid-19 pandemic, market regulators would be better off to just stay silent, the bankers said.
Bondholder meetings, a way for communication between issuers and investors, should be used for investor protection. But issuers are proving increasingly willing to treat debtholders as though they don’t matter. By tolerating this sort of behaviour, regulators will only scare off more investors from the bond market in the future.
The coronavirus may cause companies to struggle financially, forcing investors and regulators to be more understanding about revenues. But it should not become an excuse for bond issuers to abandon their responsibilities to their investors.