China's bond issuers lacking in accountability
Hong Kong
TRANSPARENT accounting may be one of the topmost concerns of bond investors in developed markets. When it comes to China, well, things aren't so straightforward.
Take the case of a Chinese textile company that has faced questions on its ownership, troubling foreign observers. When discrepancies arose after Shandong Ruyi Science and Technology Group Co sold a five-year dollar bond in June, the securities predictably tumbled. But not for long, and they're now trading a stone's throw from where they issued. Here's the sequence of events: Shandong Ruyi in an offering circular for its US$200 million of notes indicated it had a link with a state-owned enterprise, which are sometimes assumed to have the government's support. The document listed Yinchuan Tonglian Capital Investment Operation Co, a local government financing vehicle (LGFV), as its No 2 shareholder as at the end of last year, with a 26 per cent stake.
When that LGFV, Yinchuan Tonglian, the following month distributed an offering circular for its own dollar bond sale, it said it had no equity interest in Shandong Ruyi as at end-2016.
Yinchuan Tonglian told Bloomberg in a written response to questions that it had transferred the stake in July 2016 to Ningxia Ruyi Ecological Textile Co, an entity 99.5 per cent owned by Shandong Ruyi. Shandong Ruyi's bonds dropped to as low as 88.6 cents on the dollar on July 18.
Days later, the securities rebounded to 92.4 cents, after Shandong Ruyi claimed in a statement that Yinchuan Tonglian remains the "legal owner" of the 26 per cent stake, without presenting further documentation. They traded Wednesday at 93.3 cents. Shandong Ruyi declined to comment on questions on the ownership discrepancy in July, and calls this week went unanswered.
"After some initial jolt, its secondary performance shows investors remain unfazed," Sean Chang, Hong Kong-based head of Asian debt at Barings Asset Management Ltd, said in an interview. The episode serves as a reminder to global investors such as Barings that "corporate governance is one of the main risk concerns" when it comes to buying into Chinese private-sector companies. While a detailed breakdown of ownership of the Shandong Ruyi securities hasn't been published, Chinese bonds issued in Asia are typically taken up mostly by Chinese buyers, who have long had to grapple with opaque accounting standards. Any case of presenting inaccurate information on a bond offering circular to investors could open both the issuer and underwriters to lawsuits, according to capital-market lawyers, though there's been no sign of any such move with the Shandong Ruyi bond. Standard Chartered, the bank that served as sole global coordinator on the bond deal, declined to comment on the matter when contacted by Bloomberg.
Analysts at Standard Chartered, in a July 19 note, said investors should focus on Shandong Ruyi's operations and business plans, rather than dwell on the question of ownership. Shandong Ruyi has been part of the wave of foreign acquisitions out of China, snapping up French and British luxury brands. Deutsche Bank analysts the next day recommended buying the bonds on valuation grounds, while noting that the "company needs to improve on disclosure standard." A record pace of Asian dollar-bond issuance this year has spurred worries in some quarters that "drive-by" deals leave little time for investors to do much analysis.
"Weaker covenants, a developing legal framework and poor corporate governance have always been the key risks faced by investors in the Asian corporate-bond market," said Jenny Zeng, a Hong Kong-based portfolio manager & head of credit research for Asian fixed income at AllianceBernstein. It's up to investors to find spots where potential returns can sufficiently compensate for such risks, she said. BLOOMBERG
