The covert restructuring of a prominent Chinese group linked to Beijing has become a critical legal test for foreign investors holding tens of billions of dollars in bonds issued by companies in China.
The founding group of Peking University dates back to the 1980s as a successful computer hardware company led by the late Wang Xuan, a senior computer scientist at the prestigious academic institution. Wang, considered the “father of Chinese character composition”, also had close ties to the family of former President Jiang Zemin.
However, the state-backed group ran into serious debt problems after expanding into tech, healthcare, real estate and finance.
Today, he is the largest defaulter on dollar-denominated debt in China in nearly two decades, according to rating agency S&P, with around $ 1.6 billion in US dollar notes. It also defaulted on 36.5 billion rmb ($ 5.6 billion) of onshore bonds, according to data from news provider Wind.
82 billion dollars
Debt Issued In China Backed By Deeds Of Keepwell
The result of a restructuring of the group ordered by the Beijing court is expected at the end of April. The company did not respond to requests for comment.
The treatment of foreign bondholders in the restructuring is closely watched by investors who collectively took on $ 82 billion in debt issued in China backed by so-called keepwell acts.
Foreign investors have historically had little recourse to drive out debt in China, and the keepwell acts were designed to boost their confidence.
They urge the parent companies of bond issuers to maintain the financial strength of an offshore subsidiary so that it can cope with repayments, according to Fitch. The rating agency says it is “essentially a worded comfort letter” and does not create direct debt for the parent companies of bond issuers.
Out of concern that the Beijing court would not recognize these debts, investors in PUFG’s dollar-denominated bonds have launched at least two legal challenges in Hong Kong, according to documents seen by the Financial Times.
A request to liquidate one of PUFG’s subsidiaries before the restructuring deadline was filed last week, following an earlier liquidation order for which a hearing was scheduled for June.
Investors “don’t feel safe and doubt” whether they will get their funds back, a person familiar with the proceedings said.
“Will a Chinese parent company recognize its contractual obligations under a custody deed, which literally gave the impression to offshore bondholders that the deeds amounted to collateral?” the person said, adding that “the Chinese parent company has in fact brought the majority of the subscription revenue back to China for its own use.”
Simmons & Simmons, a law firm, said a former bondholder claim under the custody deed has already been dismissed by PUFG’s bankruptcy administrator in China because “the validity and l ‘effectiveness’ agreements have not been established inside the country.
“The administrator’s decision has cast significant doubts on the validity and enforceability of the keepwell agreements, at least under [mainland China’s] restructuring process, ”the law firm said in a January report.
Investors are also following the case for broader signals on how Beijing will navigate an increasing number of faults among state-backed companies and groups, which sent shockwaves through China’s $ 15 billion bond market.
S&P believes Chinese officials are keen to use cases like PUFG’s as examples as more entities are allowed to default. “They are establishing a key model for debt reduction as China improves its restructuring, resolution and collection regimes,” analysts said.
But the process is further complicated by questions about what role the Chinese Communist Party might play behind the scenes. The impact this could have on foreign bondholders is unclear.
According to Cercius Group, a Montreal-based consultancy specializing in elite Chinese politics, PUFG and the powerful Jiang family and its related factions have maintained their ties for several decades.
“The control that has been placed over Founder Group in recent years by the party is, of course, not only because the company’s finances are in disarray, but also because of the factional affiliations of successive generations of Founder’s management. Group, “Cercius said. .
Additional reporting by Sherry Fei Ju in Beijing