Offshore investors push for better protection in China bonds
HONG KONG: small group of asset managers is pushing for more protection for offshore holders of Chinese bonds, in a sign that growing default fears are putting established funding structures under scrutiny.
The ongoing debt restructuring of troubled Chinese property developer Kaisa Group Holdings has rattled many on the buy side. The company’s offshore bondholders appear set to receive worse terms than onshore creditors, although the situation remains a long way from being resolved.
In addition, lawyers say some treasurers at Chinese companies are not even aware of being in breach of covenants, assuming these are in place.
These fears have prompted some major international investors to look at ways they can better protect themselves in the event that Chinese issuers run into trouble. So far, however, they remain in the minority, as yield-hungry buyers continue to pile into offshore China debt.
“Our lawyers are looking at ways to rewrite some of the documentation around this,” said the head of Asian credit at a major Singapore-based asset manager. “We’d like to find a way to standardise systems and, at least, ensure offshore bondholders are given a fairer representation and a hearing in a local court. We’re not asking for anything particularly difficult.”
However, lawyers and other asset managers have argued that bondholders should not expect much to change. As they see it, there is little incentive for issuers to make any meaningful changes to protect offshore bondholders, as demand remains strong, particularly from retail investors and private banks.
A Moody’s study published on April 15 found that Asian covenant quality actually remained stronger than those in the US and Europe in the first quarter of 2015, though China lagged the region.
Furthermore, debt origination bankers may not want to tell an issuer that their covenants need to be stricter for fear of losing a deal.
“It’s forever the case that the investor wants stronger covenants and the issuer wants fewer,” said Jamie Grant, head of Asia fixed income at First State Investments. “But I struggle to see how we would get language in there that would really protect us like onshore creditors. If all of the assets and business are in China, it’s very difficult to get that out of China.
“Ultimately the investor has the ability not to buy the bonds of a new high-yield issue that they are not comfortable with, and then has two choices: allocate your capital to issuers with better structures or not invest.”
It appears little will change until enough bond buyers ask for it and, for now, those demanding change are in the minority. Issuers have not had much of a problem attracting buyers, even though the risks are obvious.
“The market seems to want to believe that Kaisa is an isolated case and that offshore creditors will be treated better in other situations, but I’m hearing a lot more that the actual risks are not adequately being priced in and, even still, investors are prepared to gloss through the terms and conditions and accept them,” said Vivian Lam, a partner at law firm Paul Hastings.
Yet, some market watchers believe change is afoot and, if more defaults and problems arise, market forces will eventually discourage investments. Then, bankers and issuers will have to find a way to bring them back.
Last week, China-based Cloud Live Technology Group became the first listed Chinese company to default on an onshore principal payment and, more recently, Baoding Tianwei Group warned it could miss an interest payment due April 21.