John Moody founded his eponymous ratings firm in 1909 to assess the risk of American railways defaulting on bondholders. In China, bondholders current concern is with another form of transport: toll roads. The object of their ire: a road construction company linked to the Sichuan government. They say the state-owned firm has left them in the lurch after transferring away ownership of one of its leading assets.
It was supposed to be a sound investment. The Sichuan Expressway Construction and Development Corporation was set up in 1993 to finance expressway roads across the province – the sort of projects which generate reliable toll income. And as part of that effort, it raised Rmb6 billion ($924 million) issuing five-year bonds in early 2010.
The bondholders likely congratulated themselves for getting a better yield than a bank deposit, and took comfort in the company’s implicit state guarantee.
But that confidence was shaken in March, when one of SECDC’s ‘core assets’ was injected into a separately-owned state firm without investor consent.
The contested asset: a 32% stake in Hong Kong-listed Sichuan Expressway Company, which operates five toll roads (the stake is valued at around $180 million).
That seriously impaired the firm’s creditworthiness.
“After the asset transfer SECDC’s capacity to generate cashflow may be reduced by about a third,” predicts Xu Xiaoqing, a bond market analyst with CICC.
There was reportedly no payment offered for the asset transfer, although the new owner did agree to guarantee the original bonds.
SECDC argues that notice given in Hong Kong a year earlier should have been warning enough on the move.
But that hasn’t satisfied investors. “[It] never announced the asset transfer in the [Chinese] interbank market,” one disgruntled investor complained to the Economic Observer. “We creditors are the last to hear the news.”
Still, none of the bondholders were prepared to take on a more aggressive stance when given the chance to vote on the move a month later. “The transaction is irreversible,” explains Caixin, “and voting against the guarantee would have been a meaningless gesture.”
“Company Law does not require that asset restructurings… shall be notified to the creditors,” further explains EO. So, other than crying ‘bad form’, it seems there’s little investors can do.
Also curious: that the transfer doesn’t seem to have harmed SECDC’s credit rating, with debt rating agency CCXI maintaining its AA outlook on the strength of the company’s (implied) state-backing.
“While [SECDC’s] debt repayment capacity and profitability were weakened,” CCXI wrote, “its business positions and the support from its shareholders remained stable.” According to insiders, this isn’t the first time that investors have found themselves outmanoeuvred in this way.
“If too much debt is raised, the [local] government will form another platform company, transfer the core asset to it, and issue new bonds,” one trader said to Caixin. “It’s become a trick,” admitted another credit analyst.
Although it may not be unprecedented in China’s bond market, the news comes at a low point for perceptions of Chinese corporate governance (see Talking Point). Several overseas-listed firms have been fingered for accounting fraud already this year, and investors are looking more closely at their Chinese holdings.
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