It’s no surprise that China and its corporations are being closely tracked by international investors, not only for the government’s handling of the Covid-19 pandemic but also for any changes to its financial markets that could have global ramifications.
Chinese state-owned enterprises (SOEs) don’t seem to have got the memo.
Recently, two high-profile SOEs left their investors flummoxed for failing to exercise the call option on the first call date of their $1.1bn worth of bonds.
State Power Investment Corp (Spic), one of China’s five biggest state-owned power generators and one of four approved nuclear power plant operators in the country, and China National Chemical Corp (ChemChina), a Fortune Global 500 company, both “forgot” to submit their respective call notices to investors within the relevant timeframe before their first call dates.
The oversight — particularly from firms considered standard bearers of Chinese credit — is not just unheard of but also worrying. In Asia, bonds usually get priced on the assumption that the borrower will repurchase the notes at the first call date. To protect investors, the terms also usually allow a generous step-up in the coupon of 300bp or upwards if the call is not exercised.
ChemChina’s mistake is expected to result in the coupon of its $600m 3.9% perpetual bond to be reset to about 8.9% (based on current underlying rates and the reset spread of 6.075%), adding about $24m in additional costs to the company.
Of course, some investors may be delighted with this error, but the timing is fraught. Global investors are jittery over recession fears and China’s own slowing growth; the war in Ukraine continues to add to the woes of the global supply chain; the crisis in China’s property debt market shows no signs of abating; and tech stocks globally have been in the spotlight for all the wrong reasons.
The last thing investors need is an administrative oversight raising questions around corporate governance and financial practices at some of China’s largest, and well-regarded, SOEs.
Some investors might condone the oversight, but others might tighten surveillance while dealing with Chinese credit, leading to delays in their investments.
The incidents may also prompt investors to look deeper into similar situations.
ChemChina’s $600m perpetual bond has the first call date on June 2. GlobalCapital Asia understands the bond trustee HSBC has refused to condone the delay. Most dollar bonds require issuers to give bondholders a 30 day notice for redemption before the call date. ChemChina made the announcement of repurchasing the bonds on 11 May, technically breaching the notice period.
Peer Spic is a frequent borrower, with its $500m 5.8% perpetuals becoming callable on 21 May. CreditSights analysts said in a note last week that the company cited “issues caused by Covid-19 pandemic" for a technical lapse that resulted in the bonds not being called at the first call date. Spic has not provided the 30 day notice ahead of a call.
The SOE has said it will consider purchasing the bonds at par before 17 May. As the bonds are quoted at around 103, only an investor out of its mind will tender the bonds to Spic, especially when there is some prospect of a step-up in the coupon. The next call option on Spic's perp is on November 21. Spic's perp has a coupon step-up of 400bp.
As strong state support means both ChemChina and Spic are unlikely to be facing liquidity issues to meet their bond calls, their acts have caused concerns around whether more trouble is looming at China Inc.
The fallout from such actions has been nasty in the past.
CreditSights analysts refreshed investors’ memories about an incident in August 2018, when a local SOE, Xinjian Production Construction Sixth Division State Owned Asset Management, failed to repay a Rmb500m 5.89% 270-day commercial paper on maturity.
The payment was made within the 10-day grace period. The company changed its initial excuse of non-payment from liquidity issues to an administrative delay in transferring the funds to the clearing house. A few days later, however, the SOE’s chairman was arrested for alleged debt mismanagement.
That was a drastic situation. Since then, Chinese corporations have become more sophisticated and are increasingly careful about the message they send markets. But if there’s anything to learn from ChemChina’s and Spic’s moves, it is that the work is not over yet. China Inc need to get more organized.