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Chinese state-owned borrower infuriates investors with sharp haircuts

[SHANGHAI] An attempt to restructure three dollar bonds by China's Qinghai Provincial Investment Group that will pay bond holders only 40 cents on the dollar is "wickedly designed", investors said on Friday.

Earlier this week, a subsidiary of Qinghai Provincial Investment and Development Co - which, like QPIG, is controlled by Qinghai's local government - proposed buying the US$850 million worth of bonds at a sharp discount.

Guozhen International Trade Consulting, a unit of QPID, offered to buy US$300 million of QPIG bonds due 2020 at 41.19 per cent of face value. In addition, Guozhen offered to buy two batches of bonds due 2021 worth a total of US$550 million at 36.75 per cent of face value.

Du Ying, director of QPID, said on a conference call Friday that if bond investors chose not to accept the offer, their chances of getting money back were slim, because the issuer "is in a difficult operational situation" and the bonds are unsecured.

"This is cheating. This is arbitrage. This practice is extremely wicked, and shameless," an enraged investor said during the conference call. His call was cut off by the operator.

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Another investor raised the same issue, saying the offer involves conflicts of interest, and is "wickedly structured."

"The whole structure is an act of arbitrage. You're definitely not a white knight. You're a black knight," the investor told the QPID managers. "You're using financial tricks to harm bond investors. This is damaging capital markets order."

Mr Du declined to answer the questions directly. He said only that the two companies were unrelated and that QPIG, the bond issuer, is struggling and suffering from liquidity shortage. The conference call was cut short.

The tender offer for QPIG bonds follows the pattern of debt restructuring of another state-owned company, Tewoo Group, in late November.

In that deal, the struggling commodity trader Tewoo became the first major state-owned company to miss a payment on and restructure an offshore bond in two decades, according to Moody's Investors Service.

Rising defaults by China's state-owned companies underline the fiscal strain on local governments from a slowing economy. They have also made investors wary about buying bonds with perceived government backing.

"The Tewoo template has been set of severe haircuts for offshore investors in state-linked issuers, with recovery rates moving lower," ANZ strategists Owen Gallimore and Ting Meng said of the Qinghai deal in a note on Friday. "Others are likely imminent and we are concerned over market sentiment." 


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