Banking & Finance

Show me the money

Bond defaults rattle investors, especially at firms with cash on the books

Wang-Xuan-w

Wang: former chairman of Founder

In the late 1970s Chinese newspapers were still setting type by hand. In order to print in a language with several thousand characters, more than 20 tonnes of lead were used each year for the mountain of metal the typefaces required.

Computers were already available but problematically for China were largely based on English language technology. A pressing concern became how the Chinese could get computers to use their language so as to transform archaic printing practices. Some even suggested that written Chinese be converted into romanised pinyin to give the country a chance at joining the digital revolution.

Step forward the computer scientist Wang Xuan from Peking University (aka Beida). His invention – a laser photo composition system for Chinese character typesetting – became the killer product of Founder, a state-owned enterprise set up by Beida in 1986, which has since grown into the largest university-backed SOE in China.

Founder has grabbed headlines this week for more inglorious reasons: as the biggest name in a slew of defaults this year. The company rocked investors on Monday with an announcement that it was unable to repay a 270-day, Rmb2 billion ($285 million) bond. To market commentators it was a shocking revelation. Besides being the commercial crown jewel of one of China’s top universities, the investment conglomerate is supposed to have Rmb360 billion of assets sitting on its books, including a cash pile of Rmb45 billion. Lianhe Ratings Global, a leading domestic rater, was assigning an “AAA” rating to Founder’s bonds too.

The fact that Founder defaulted on short-term paper spoke volumes about its real financial health, 21CN Business Herald noted, suggesting that it might need to bring in a white knight in the form of another major state enterprise.

Founder’s default has stoked concerns about the finances at other business units formed by China’s universities, Caixin Weekly said. Tsinghua Unigroup, a top chipmaker run by Tsinghua University, has also been under the spotlight, following a tumble in its US dollar bonds.

Demand for cash is generally higher at year-end, Caixin reported, which helps to explain the flurry of defaults as 2019 draws to a close. Tunghsu Optoelectronic is another firm unable to meet repayment commitments, defaulting on three bonds in less than a month. The maker of electronic display panels, which reported cash holdings of more than Rmb18 billion as of September, missed another interest payment on its Rmb1.7 billion yuan onshore bond due on Monday, according to an exchange filing.

Data compiled by Bloomberg claims at least 15 defaults by Chinese firms since the start of November, with ‘credit events’ now passing Rmb120 billion in total.

That means last year’s record on corporate defaults – at Rmb121.9 billion – looks set to be beaten. All eyes are now on Tewoo Group, a commodity trader controlled by Tianjin’s local government, which looks like defaulting on a $300 million bond a week before Christmas. In another sign of the cash crunch, state banking heavyweight ICBC, a major creditor of Tewoo’s, paid nearly $8 million of interest on its behalf last month.

How Tewoo’s situation is handled could serve as a warning on whether the government will allow some of its bigger SOEs to go under.

Yet elsewhere there was relief, especially for investors in HNA’s bonds. The ultra-acquisitive aviation group has been undergoing debt restructuring for nearly two years, but this month there was news that Hong Kong Airlines, one of its subsidiaries, was having difficulties paying staff. State banks then jumped to HNA’s rescue: according to HK01, a newspaper, China Development Bank led a consortium in a HK$4.4 billion ($564 million) loan this week. The three-year loan was priced at a fixed coupon of 4.75%, not the worst rate for a debt-laden firm in an economy ridden with credit events of late.


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