The business arm of China’s most prestigious university met its creditors on April 30, and the outcome has shaken investors’ faith in widely used contracts for Chinese offshore bonds.
The bankrupt Peking University Founder Group used a short cut known as a keepwell deed to borrow US dollars from foreign investors. Now, its state-appointed restructuring administrator has thrown doubt on the enforceability of these contracts by classifying them as pending recognition.
This decision impacts bondholders of about 16 per cent, or US$96 billion, of outstanding offshore bonds issued by Chinese companies, according to Redd, a market data provider. More than US$12 billion of debt rated by credit rating agency Moody’s uses keepwell deeds.
“This is the first time keepwell deeds have been tested in court. The administrator could set an important precedent,” said Renee Lam, a credit officer researching companies across the Asia-Pacific region at ratings agency Fitch.
From British bank HSBC suspending dividend payments to rising defaults on payments due to bondholders, borrowers and governments are riding roughshod over investors’ rights as they grapple with the fallout from the novel coronavirus pandemic.
With more companies coming under stress as the global economy tumbles into its worst downturn since the 1930s’ Great Depression, legal fights and restructurings will test other grey areas of investments that have mushroomed during the world’s longest bull market since the 2007-08 global financial crisis.
“When the market is good, investors don’t worry. But when the market is stressed, they take another look at these structures,” said Soo Cheon Lee, chief investment officer at credit-focused banking and asset management group SC Lowy.