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AsiaAsia CommentGC Asia View

Bond issuers need to stop abusing Covid-19 excuse


More and more Chinese issuers are using the Covid-19 pandemic as a convenient excuse to justify missed or delayed payments of bonds. The trend needs to stop.

Conglomerate Yihua Group defaulted on a Rmb1bn ($141m) domestic bond last week, failing to pay Rmb65m of annual interest on the 6.5% 2022 deal. In a public filing on May 6, the Guangdong-based company blamed the Covid-19 outbreak for its tight liquidity, saying the pandemic had severely impacted its operations.

But what Yihua failed to mention in the filing was that its finances had already been in question last year — long before the pandemic started.

Concerned investors have been selling off a Rmb600m bond from its listed subsidiary, Yihua Lifestyle Technology, in the secondary market since April 2019. The firm’s finances have also come under the scrutiny of the Shanghai Stock Exchange.

Additionally, the parent, Yihua, was involved in a dispute about a Rmb2bn loan. Late last year, it switched to a private payment of the principal of a Rmb1.2bn five year deal after investors decided to put back 98% of notes — a move that was regarded by onshore market participants as an act of desperation to avoid a public default.

The company, which has businesses in the lifestyle, medical and healthcare, hospitality and real estate sectors, as well as finance, is only the latest example of a beleaguered firm blaming Covid-19 for its troubles.

The pandemic has increasingly become a convenient excuse for many mainland corporations to explain their woeful state of affairs — an alarming development that needs to be tackled.

Earlier this year, for instance, China Huiyuan Juice Group skipped a semi-annual coupon payment on a $200m 6.5% 2020 bond, saying Covid-19 had “adversely” affected its cashflow in the short term. However, Huiyuan had failed to pay on time the interest on the same bond twice before. It had also been unable to redeem a HK$1bn convertible bond in early 2019.

More recently, last month, long-embattled HNA Group said it delayed the repayment of an onshore bond to “properly respond” to the challenges brought by the coronavirus outbreak, after its main businesses — including aviation, tourism and hospitality — were severely impacted. The statement came after HNA was criticised for using an 11th-hour investor meeting to approve the decision on the delayed payment.

There is, of course, some truth to all of these claims, as the pandemic has indeed taken a toll on companies’ operations and finances — not just in China, but globally.

However, it has served as an easy excuse for firms that are looking to shift focus away from their pre-existing financial or governance problems. This is especially the case as using Covid-19 is also likely to secure a vote of sympathy from investors or even local governments.

Some Chinese bond issuers have also been taking a different kind of advantage of the pandemic, by printing so-called “coronavirus prevention and control bonds” onshore.  

Chinese regulators, supportive of issuers using capital markets to fund their needs during the outbreak, have fast-tracked the approval process for these deals, while setting a low bar of 10% of the use of proceeds going towards fighting Covid-19. But that support has led to some issuers putting the Covid-19 label on transactions that are primarily for refinancing old debt.

It is time to end the misuse of Covid-19 as an excuse for shoddy financials and defaults. Regulators and investors need to take charge and not let these companies off the hook easily.

These are testing times for corporations, and regulators, across the globe. But it’s exactly in these difficult conditions that good practices become all the more important. China should beware slipping standards in its market. 

Yihua, Huiyuan and HNA did not respond to emails seeking comments.