One byte too many

Stop sign: Xiangeqing in trouble

Stewing, frying, pot-roasting, braising and smoking are all hallmarks of Hunan cuisine. And perhaps they are what bond investors would like to do to Xiangeqing restaurant founder Meng Kai, after his company became the second listed entity to default in China’s onshore bond markets on April 7.

Last summer Meng switched business model from hotpots to hotspots, renaming his company Cloud Live Technology in a last ditch attempt to save the ailing restaurant business that he had set up 21 years earlier.

It did not work. Before the unconvincing expansion into cloud computing, Xiangeqing was one of China’s best-known eatery brands. Specialising in Hunan-style cuisine, it was a venue of choice for many officials and in 2009 it became the first private-sector restaurant chain to go public. At the time, Meng was said to be worth Rmb3.4 billion ($548 million).

More recently, his business model fell foul of Xi Jinping’s austerity and anti-corruption campaign, which began in late 2012 and has shown no sign of abating. The company swung from a net profit of Rmb120 million in 2012 to a net loss of Rmb564 million in 2013.

When Meng changed tack last year, there were already words of caution for investors. “The concepts of ‘big data’ and ‘cloud computing’ that Xiangeqing talks about are hot, but also very general, and it hasn’t explained exactly what it plans to do,” Zhang Lili from internet research house Analysys International, told the Global Times.

Stock market regulators have also been investigating Cloud Live for alleged rule violations, with the company telling shareholders that Meng has gone on an “overseas holiday” from which he has yet to return.

The day before the default, a spokesman said Cloud Live had been able to scrape together Rmb161.4 million in cash, but was still short of the Rmb240.6 million it needed to redeem the bond.

The company’s debt was already trading in distressed territory, with its yield rising from 8.9% at the end of 2014 to 20% by early April. But equity investors seem more sanguine about Cloud Live’s difficulties. Since reaching a low of Rmb5.3 in early February, the share price had risen almost 60% by April 14.

Perhaps the hope is a similar bailout to the one that the government organised for Chaori, after the solar firm became the first listed company to default on a coupon payment last March (see WiC229). But domestic commentators query whether there will be similar intervention this time, because Cloud Live is a much smaller company. Nor is it in a strategic industry similar to the new energy sector.

In fact, there are some suggestions in the media that Meng should be left to stew in his own juice, with Cloud Live being allowed to fail. Xinhua was typical, reporting comments from Fan Wei of Hong Yuan Securities that a “landmark default” would make investors think more carefully, “helping money to flow to deserving companies”.

It is a view also espoused by the global ratings agencies, with Fitch arguing again this month that the authorities need to formalise the legal process for domestic bankruptcies and restructurings.

And this may soon be tested following news of two more potential defaults in the offshore bond markets, as well as more problems with domestic guarantee companies.

On April 8, coking coal importer Winsway missed a coupon payment on a $309.3 million 2016 bond. It is now using its 30-day grace period to enter restructuring negotiations with creditors.

Likewise, water treatment firm Sound Global is heading for a potential default on its $150 million 2017 bonds after failing to file its 2014 results on time.

Meanwhile, it is being reported that Hebei’s largest loan guarantee company has stopped repayments on Rmb50 billion of debt that it has guaranteed. Century Weekly says that banks are calling in loans backed by the company in question – Hebei Financing Investment Holding, which is wholly-owned by the Hebei provincial government.

The magazine also highlights the case of a government-owned guarantor in the ghost city of Erdos, which says that it lacks the funds to honour guarantees on a Rmb200 million bond issued by road-builder Sunry. The bond was due for repayment at the end of this week.

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