Monday, 25 January 2010
Mainland defaulters sting small investors
China may boast dazzling economic growth but that has failed to translate into profits for some bond holders and thousands of small investors in Singapore who have seen their investments in a group of mainland companies listed in the city state turn to dust.
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Mainland defaulters sting small investors
Naomi Rovnick
25 January 2010
China may boast dazzling economic growth but that has failed to translate into profits for some bond holders and thousands of small investors in Singapore who have seen their investments in a group of mainland companies listed in the city state turn to dust.
Since late 2007, a spate of so-called S-chips - mainland companies listed on the Singapore exchange - have borrowed money then failed to repay the debts, with some becoming mired in fraud scandals.
Of the 11 S-chips that issued convertible bonds between 2005 and 2008, six have declared themselves unable to repay. Two of those six - steel group Delong Holdings and property developer Sunshine Holdings - have successfully restructured their finances while the rest remain locked in talks with creditors.
Convertible bonds are debt instruments that investors can convert into shares at a later date.
Another five S-chips failed to repay bank loans during 2008-9. The effects on their share prices have been, predictably, crushing.
“We are calling on the Beijing government to discipline these companies any way it can,” said David Gerald, the chairman of the Securities Investors Association of Singapore, which represents 4,000 small shareholders.
“But there is nothing else we can do. Singapore does not have the authority to police Chinese companies,” he said.
In June 2008, blue-chip investment bank Morgan Stanley sold US$109 million worth of convertible bonds issued by waste recovery group Sino Environment Technologies, based in Fujian , to a group of lenders including US investment firm Stark Investments.
Sino-Environment’s share price has since crashed from S$1.30 (HK$7.18) on the day it sold the convertible bonds to S$0.135 when the stock was suspended from trading in September.
During that period, Sino not only defaulted on its bonds - the Singapore-listed firm is also being investigated by the city state’s Monetary Authority, a person involved in the case confirmed, after its auditors Pricewaterhouse Coopers said they could not verify the whereabouts of US$85 million of Sino-Environment’s cash.
The Monetary Authority declined to comment.
China Printing & Dyeing, a textiles company, is one of the group of S-chips that could not repay bank loans.
It has fallen under what the Singaporeans call “judicial management”, the city state’s version of bankruptcy protection.
China Printing & Dyeing’s shares were suspended from trading in October 2008 when its chief executive Tao Shoulong and deputy chief executive Yan Qi, a husband and wife team, disappeared. The duo fled after a subsidiary announced it was unable to honour 2 billion yuan (HK$2.27 billion) worth of debts. The pair were subsequently arrested in Guangdong, according to numerous reports in Singapore. The company was delisted from the Singapore exchange last week, leaving its shareholders with nothing.
Then there was Yangtze River Delta aluminium company Ferro-China, which buckled under the weight of almost US$1 billion of debts in 2008 before entering mainland bankruptcy proceedings.
The most recent S-chip bond default came from China Milk Products Group, based in Heilongjiang, that produces bull semen and cow embryos for cattle breeders,
The vast majority of the investors who bought US$150 million worth of convertible bonds China Milk sold through Deutsche Bank in December 2006 have exercised an option to get their money back, a person close to the agricultural company confirmed.
China Milk’s net profit tumbled 73 per cent in the three months to last June compared to a year previously. The business was hit by last year’s tainted milk scandal on the mainland, which cut demand among dairy farmers for new livestock.
On January 5, China Milk told its bond holders it would not be able to meet a repayment deadline. The company said it had the cash but was awaiting approval from the State Administration of Foreign Exchange, the mainland regulator that controls the flow of funds to and from abroad, to get it out of China. A person with knowledge of the firm said China Milk was confident of repaying its bond holders as soon as possible.
Then there is the case of Sino-Environment, which according to a person close to the company, could take many months to resolve.
The entire executive board, including chairman Sun Jiangrong, resigned on January 2 and a bitter spat has broken out between Sino-Environment’s independent directors, led by new chairman Charlie In Nany Sing, who were appointed by investors to sort out the mess, and its mainland staff.
In December, a workers union at one of the firm’s subsidiaries, Thumb Env-Tech Group (Fujian) announced its “few hundred” workers would resign en masse because the parent company’s independent directors were “attacking” the executive directors and the company.
After PriceWaterhouse Coopers issued its report, the independent directors obtained an injunction from the Singapore Supreme Court to ban Sino-Environment’s executive directors from selling the company’s assets or signing contracts.
In May, a Sino-Environment subsidiary said it paid 920 million yen (HK$79.53 million) to a Japanese firm for chemicals, but the alleged recipient told the auditors it never received the cash.
When PwC visited Sino-Environment’s bank, Xiamen International Bank, in Quanzhou , to try to investigate, the bank’s branch manager forced the accountants off the premises and shuttered the building.
Another subsidiary, Fuda Desai Environmental Protection, allegedly invested 230 million yuan in four waste power projects, but PwC could not find any evidence that the payments were approved by the board, or even made.
Again, the auditors attempted to verify documents relating to the deals at the branch of Bank of Communications through which Sino-Environment had made the supposed payments.
They were met by a personal relationship banker who would not let them talk to anyone else or check the branch’s IT systems to see if the payment documents were real.
The Sino-Environment executive directors, who have since resigned, accompanied PwC on both bank visits.
A third subsidiary, Fujian Weidong EPT Co, made two interest-free loans worth 50 million yuan to “two parties that did not appear related to the company,” the PwC report continued. The accounting firm said it “did not come across any documentation evidencing that the company’s board had been informed of or approved these loans”.
PwC complained that Sino-Environment’s executive directors had “hampered the performance” of its work. The accounting firm said Sun Jiangrong, who declined to comment for this article, would not provide any documents supporting the supposed deals and payments.
A person involved in the discussions with the Sino-Environment’s bond holders said there was no certainty the US$109 million would be returned to them. Morgan Stanley declined to comment on the case.
The SIAS’ Gerald said Singapore could do nothing more than pass its concerns on to mainland authorities. And in China, the Sino-Environment case has already been closed. The Fuzhou Public Security Bureau said on January 1 it had found no evidence of embezzlement at Sino-Environment, according to an announcement on Sino-Environment’s website. A spokesman for the Singapore Stock Exchange would not comment on the issue of S-Chips defaulting on their loans.
Of course, Hong Kong investors have suffered similar problems. Since late 2007, 11 mainland companies listed here have also failed to repay some or all of their debts, according to data.
A corporate debt salesman at an international bank, who asked not to be named, does not blame these mainland insolvencies entirely on the companies themselves. “There was so much demand in the boom years from hedge funds and banks for debt linked to Chinese companies,” he said. Maybe everyone was a bit too dazzled by geography.”
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