(Bloomberg) — For Dhiraj Bajaj, the sudden twists and turns were unlike anything he had seen in his two-decade investment career.
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First, Dalian Wanda Group Co. signaled to bondholders — including Bajaj — that all was well. The 400 million dollars owed to them will be paid in full. Days later, some creditors were alerted to the bombshell that the company was $200 million short, prompting a major sell-off in debt.
And then, just as quickly, the lenders were told there really was enough money, sending the bonds out again.
Wanda finally pays off July’s debt. But Bajaj, head of Asian fixed income at Lombard Audier (Singapore) Ltd, said the incident and others have raised concerns about investing in China.
This is becoming an increasingly common refrain in the financial community. As dozens of debt-ridden property companies, including industry giant Country Garden Holdings Co., struggle to avoid defaults, global money managers say weak — and many argue worsening — governance and disclosure practices are keeping them outlonging mainland borrowers. – Time. Experts warn that this could reduce access to finance and lead to higher borrowing costs for years to come, further hampering China’s already stretched economy.
“There is a clear deterioration in standards, and this will not be tolerated by the international investment community,” Bajaj said. “We are becoming increasingly tolerant of many Chinese high-yielding companies due to the lack of transparent information requirements and direct, direct communication.”
Representatives for Wanda and Home Garden did not respond to multiple requests for comment.
Of course, China was not a shining example of good corporate governance to begin with. Many companies have been plagued by hidden debt and accounting errors for years.
But with the country’s dollar bonds returning an average of more than 9 percent between 2012 and 2020 — less than 7 percent for comparable U.S. debt — money managers, in general and at large, would do well to look the other way. .
Those profits are now a distant memory. China’s offshore junk bonds, mostly issued by builders, have lost more than $127 billion in value since peaking two and a half years ago; It comes at a time when Beijing has introduced the so-called three red lines to slow lending by developers.
The policies are intended to curb years of excessive debt-fueled expansion by developers and property speculation by homebuyers. But they pointed to record firms defaulting as restructuring costs escalated and led to various restructuring processes.
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While many global money managers recognize that weak corporate governance is a risk factor when investing in China, ratings, particularly consistent relationships with lenders, have worsened amid growing concern.
Country Garden, after missing an initial deadline to pay interest on two dollar bonds last month, then left investors in the dark for weeks over whether it intended to repay its obligations before the grace period expired (it finally paid the interest on Tuesday). He did not give any explanation.
Just last month, developer China Aoyuan Group Ltd. filed a regulatory filing in which it said three-quarters of existing noteholders supported the restructuring deal. The language has led some to believe the company has passed a key threshold to approve the deal. But the support was only applied to a limited number of security holders, leading to complaints that the developer was not giving a clear picture of investor support for the scheme.
Last year, state-backed real estate firm Greenland Holdings Corp. rocked the market with a surprise request to delay payments on one dollar bond for a year, only to issue a separate note a few months later.
And in the year In 2021, Fantasia Holdings Group shocked investors by defaulting on a dollar bond and days after the company defaulted on a dollar bond and a privately placed note, weeks after it assured creditors it was not insolvent.
One of the investors, who asked not to be identified, said on a private matter that Fantasia founder Zeng Ji asked about defaulting on payments after the company defaulted on debt through the messaging app WeChat. Zeng replied with a GIF of a cat on a litter box with Chinese words superimposed on it.
Representatives for China Ayuan, Greenland and Fantasia did not respond to requests for comment. Bloomberg reached out to representatives of Fantasia for comment from Zeng, but none was forthcoming. No contact details for Zeng have been provided or are publicly available.
“Tapping the credit markets is not a one-time deal. Even after stressors or defaults occur, a company should not just run to seed,” said Lawrence Lu, senior director of corporate ratings at S&P Global Ratings. is it.
“Weak” management
S&P evaluates corporations on the quality of governance and management as part of its credit ratings. The rating company assesses governance factors, including governance culture, regulatory or legal violations, communication consistency and financial reporting. Companies are generally assigned strong, satisfactory, fair, or poor ratings.
He said most of the mainland’s speculative borrowers would be classified as ‘weak’, given the significant deterioration in performance in recent years, coupled with liquidity problems in the property sector.
“Communications with various stakeholders should be more frequent, transparent, and issuers should give equal treatment to all investors,” Lu said. Compared to international standards, there is much to be done.
That’s easier said than done, according to a former investor relations specialist at Default Builder.
Companies’ cash position is often volatile as they seek to complete projects, and funds set aside for interest payments are sometimes used to support operations in liquidity problems, he said, adding that their future business opportunities are uncertain. Some developers prefer to keep a low profile rather than make promises to lenders they can’t keep, the person added.
‘We can’t invest’
Impax Property Management Group Plc
“Foreign money managers are still willing to invest in China, but it depends on how much we invest,” Li said. “We are facing a market full of uncertainty, and coupled with a lack of transparency, it is difficult to make predictions. We cannot invest without forecasting.
This could have major consequences for companies looking for financing, said Tommy Wu, senior economist at Commerzbank AG.
“All companies should turn to offshore financing, putting more pressure on local banks and authorities who are busy clearing debts,” Wu said. “Also, Chinese companies will raise their financing costs and erode their profitability, reduce their desire to expand business, and even lead to layoffs, all of which will further weigh on China’s economy.”
The world’s second largest economy does not need more challenges. A private survey of China’s services sector showed activity expanded at its slowest pace in August this year as the outlook darkened and asset turmoil deterred people from spending.
Beijing is trying to revive confidence as the latest data showed home sales fell for a third straight month, adding to inflation. Late last week, China moved to allow its biggest cities to lower down payments for homebuyers, and encouraged lenders to cut rates on existing loans.
Speculative bets that authorities could extend support sent developers reeling from a record high Wednesday.
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Lombard’s Audier Bajaj said it would fall to Chinese regulators to step up efforts to better ensure high corporate governance standards.
This includes the Hong Kong Securities and Futures Commission as well as the People’s Bank of China, the National Development and Reform Commission and the China Securities Regulatory Commission.
A representative of the SFC said that incidents such as the selection of market moving data by companies could fall under market abuse provisions and would be taken “very seriously” by the regulatory body.
The PBOC, NDRC and CSRC did not respond to requests for comment.
“Something needs to be done by the regulators in China,” Bajaj said. If not, I am afraid that the bond payment for the Chinese company will reduce the base of international investors.
This is another blow to an economy struggling to attract foreign investors. U.S. Commerce Secretary Gina Raimondo said last week that U.S. businesses consider China “impossible to invest in,” even though Beijing has promised better treatment to international investors in recent months.
For Willem Glori, the portfolio manager at LGT Capital Partners, which holds Wanda’s bonds, it will take more than a whim to win back his trust.
He said it wasn’t the conflicting messaging or the inflation that was most troubling about the July incident. Even more disappointing to him is the way some investors were told about the company’s plans before others.
“It’s not distributed in an open way to all investors at the same time,” Glory said. “They say one thing to some investors and the next day they mention something else if there is development. It is unlikely that investors should be talking to companies every day to get the latest issue.
–With assistance from Lulu Yilun Chen, Emma Dong, April Ma, Alice Huang, and Dorothy Ma.
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