Tuesday, April 13, 2021
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Foreign investors face critical legal test for $82bn in China bonds

The secretive restructuring of a high-profile Chinese group with ties to Beijing has emerged as a critical legal test for international investors holding tens of billions of {dollars} in bonds issued by firms in China.

Peking University Founder Group traces its origins again to the Nineteen Eighties as a profitable {hardware} enterprise helmed by the late Wang Xuan, a prime pc scientist on the prestigious tutorial establishment. Wang, thought-about the “father of Chinese character typesetting”, additionally had shut connections to the household of former president Jiang Zemin.

However, the state-backed group bumped into extreme debt issues after increasing into know-how, healthcare, property and finance.

Today, it’s the largest defaulter on dollar-denominated debt in China in almost twenty years, in accordance with score company S&P, owing about $1.6bn in US greenback notes. It has additionally defaulted on Rmb36.5bn ($5.6bn) of onshore bonds, in accordance with knowledge from info supplier Wind.


$82bn


China-issued debt backed by keepwell deeds

The results of a Beijing court-ordered restructuring of the group is anticipated by late April. The firm didn’t reply to requests for remark.

The remedy of international bondholders in the restructuring is being intently watched by investors that collectively have taken on $82bn in China-issued debt backed by so-called keepwell deeds.

Foreign investors have traditionally had little recourse to chase money owed in China and keepwell deeds have been designed to spice up their confidence.

They commit bond issuers’ guardian firms to keep up an offshore subsidiary’s monetary energy in order that it will possibly meet repayments, in accordance with Fitch. The score company says they’re “essentially a strongly worded letter of comfort” and don’t create a direct debt legal responsibility for the guardian firms of bond issuers.

Out of concern the Beijing courtroom won’t recognise these money owed, investors in PUFG’s dollar-denominated bonds have launched at the least two legal challenges in Hong Kong, in accordance with paperwork seen by the Financial Times.

An software to liquidate one in every of PUFG’s subsidiaries forward of the restructuring deadline was made final week, following an earlier winding up order for which a listening to was scheduled for June. 

Investors “feel unsafe and doubtful” over whether or not they’ll recuperate their funds, an individual aware of the proceedings stated.

“Will a Chinese parent recognise its contractual obligations under a keepwell deed, which literally gave the impression to offshore bondholders the deeds are equivalent to a guarantee?” the individual stated, including that “the Chinese parent actually took the majority of subscription proceeds back to China for its own use”.

Simmons & Simmons, a legislation agency, stated that an earlier bondholder’s declare beneath the keepwell deed has already been rejected by PUFG’s chapter administrator in China as a result of “the validity and effectiveness” of the preparations haven’t been established contained in the nation.

“The administrator’s decision has cast significant doubts concerning the validity and enforceability of keepwell agreements, at least under [mainland China’s] restructuring process,” the legislation agency stated in a January report.

Investors are additionally following the case for broader alerts of how Beijing will navigate a rising variety of defaults amongst corporates and state-backed teams, which have despatched shockwaves via China’s $15tn bond market.

S&P believes Chinese authorities wish to use instances like PUFG’s to function examples as extra entities are allowed to default. “They establish a key template for debt workouts as China improves its restructuring, resolution, and recovery regimes,” analysts stated.

But the method is additional difficult by questions over what function the Chinese Communist occasion could also be enjoying behind the scenes. There is an absence of readability over what influence this might need on international bondholders.

According to Cercius Group, a Montreal-headquartered consultancy specialising in elite Chinese politics, PUFG and the highly effective Jiang household and its associated factions have maintained their ties over a number of a long time.

“The scrutiny that has been placed on Founder Group in recent years by the party is, of course, not solely because the company’s finances are a mess, but also because of the factional affiliations of Founder Group’s successive generations of senior management,” Cercius stated.

Additional reporting by Sherry Fei Ju in Beijing

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