Foreign investors face critical legal test for $82bn in China bonds

The secret restructuring of a prominent Chinese group associated with Beijing has emerged as an important legal test for foreign investors holding tens of billions of dollars in bonds issued by Chinese companies.

Peking University’s founding group traces its origins in the 1980s as a successful hardware business led by the late King Election, a top computer scientist at a prestigious academic institution. The king, who was considered the “father of kanji typesetting,” had a close relationship with the family of former President Jiang Zemin.

However, the state-backed group faced serious debt problems after expanding into technology, healthcare, real estate and finance.

According to rating agency S & P, China is today the largest defaulter of dollar-denominated debt in nearly 20 years, paying about $ 1.6 billion in US dollar bills. By default, RMB 36.5 billion ($ 5.6 billion) of land bonds are issued, according to data from information provider Wind.

$ 82 billion

China-issued debt backed by Keepwell Certificates

The result of the reorganization of the group by a Beijing court order is expected by late April. The company did not respond to requests for comment.

The treatment of foreign bondholders in restructuring is carefully watched by investors who have collectively assumed $ 82 billion in debt issued by China. So-called Keepwell Certificate..

Foreign investors have historically had little means of tracking debt in China, and Keepwell certificates were designed to increase their credibility.

According to Fitch, they promise the bond issuer’s parent company to maintain the financial strength of its offshore subsidiary and be able to handle repayments. Rating agencies state that these are “essentially strong letters of comfort” and do not impose direct debt on the bond issuer’s parent company.

Investors in PUFG’s dollar-denominated bonds have raised at least two legal issues in Hong Kong, fearing that Beijing courts will not recognize these debts, according to a document read by the Financial Times.

Last week, following an early liquidation order scheduled for a hearing in June, an application was filed to liquidate one of PUFG’s subsidiaries before the restructuring deadline.

Investors said it was “dangerous and suspicious” about whether to recover the funds.

“Do Chinese parents recognize the contractual obligations under the Keepwell Certificate, which gave offshore bondholders the impression that the certificate was literally equivalent to a guarantee?” Parents actually brought most of their subscription revenue back to China for their use. “

Law firm Simmons & Simmons said that PUFG’s bankruptcy trustees in China have already dismissed previous bondholder claims under the Keepwell Certificate because the “effectiveness and validity” of the arrangement has not been established domestically. Said that.

“Administrator’s decision raises serious questions about the validity and enforceability of Keepwell contracts, at least under: [mainland China’s] The restructuring process, “the law firm said in a January report.

Investors are also following the case for a broader signal about how Beijing navigates Increase the number of defaults Among companies and state-owned groups that have sent a shock wave to China’s $ 15 trillion bond market.

S & P wants to use a case like PUFG as an example, as more entities are allowed to default. “As China improves restructuring, resolution and recovery, it will establish an important template for debt repayment,” analysts said.

But the process is further complicated by the question of what role the CCP plays behind the scenes. It is not clear how this could affect foreign bondholders.

According to Cercius Group, a Montreal-based consultancy specializing in elite Chinese politics, PUFG and the powerful Jiang family and their affiliates have maintained a relationship for decades.

“The scrutiny imposed on the founder group by the party in recent years is, of course, not only because of the company’s financial turmoil, but also because of the faction of the founder group’s successive senior management,” Celsius said. Told. ..

Additional report by Sherry Fay Ju in Beijing

Foreign investors face critical legal test for $82bn in China bonds Source link Foreign investors face critical legal test for $82bn in China bonds

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