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 leading 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, according to the S&P rating agency, it is the largest default on Chinese dollar-denominated debt in nearly two decades, with around $ 1.6 billion in U.S. dollar notes. It also defaulted on 36.5 billion Rmb ($ 5.6 billion) of onshore bonds, according to data from news provider Wind.
The result of a Beijing court-ordered restructuring of the group is expected by the end of April. The company did not respond to requests for comment.
The treatment of foreign bondholders in the restructuring is being closely watched by investors who have collectively taken on $ 82 billion in debt issued by China and backed by so-called “keepwell” deeds.
Foreign investors have historically had little recourse to drive out debt in China, and the deeds of custody 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 they are “essentially a strongly worded comfort letter” and do not create direct debt for the parent companies of the bond issuers.
Fearing the Beijing court would recognize these debts, investors in PUFG’s dollar-denominated bonds have launched at least two legal challenges in Hong Kong, according to documents viewed 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 “feel in danger and doubt” whether they will get their funds back, said a person familiar with the process.
“Will a Chinese parent company recognize its contractual obligations under a deed of custody, which literally gave the impression to offshore bondholders that the deeds amount to collateral?” The person said, adding that “the Chinese parent company has in fact brought the majority of the subscription proceeds back to China for its own use.”
Simmons & Simmons, a law firm, said an earlier claim by a holder of obligations under the Deed of Conservation has already been rejected by PUFG’s bankruptcy administrator in China because “the validity and effectiveness “of the agreements have not been established within the country.
“The administrator’s decision cast significant doubts on the validity and enforceability of conservation 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 handle a growing number of defaults among state-backed companies and groups, which have sent shockwaves through the Chinese bond market of 15 billions of dollars.
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 settlement as China improves its restructuring, resolution and recovery regimes,” analysts said.
But the process is further complicated by questions about the role the Chinese Communist Party can play behind the scenes. There is a lack of clarity on the impact this could have on holders of foreign bonds.
According to Cercius Group, a Montreal-based consulting firm specializing in the Chinese political elite, the PUFG and the powerful Jiang family and its related factions have maintained their ties for several decades.
“The scrutiny that has been placed on 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 senior executives. of the Founder Group, “said Cercius. .
Additional reporting by Sherry Fei Ju in Beijing