Chaori Solar’s default on its Rmb1.09 billion ($195 million) bond may not lead to an acceptable template for resolving similar issues.
The Shenzhen-listed solar company, which in March became the first Chinese company to default on its onshore corporate bonds, is likely to see the bond bailed out by state-owned enterprises.
“According to our calculation, the principle and the interest of the Chaori bond can be fully paid, if the restructuring proposal is well executed, and the related parties exercise the guarantee,” China Securities, the trustee of the bond, said.
Chaori will collect a total Rmb1.96 billion from the sale of new shares to a consortium of nine investors plus a sale of assets to other investors, according to Chaori’s proposed restructuring plan, approved by bondholders last week.
From this it needs to repay bondholders and other creditors.
To ensure every bondholder will be repaid, the company secured two bond guarantors — China Great Wall Asset Management and Shanghai Jiuyang Investment Group — to top up the payment. This was not contained in the proposal, which has caused some confusion.
In separate announcements, the guarantors said they would offer a total of Rmb880 million with an effective deadline of December 31 2014.
“I still hold cautious concerns towards the final results,” said Gan Guolong, a lawyer with Shanghai Delson Law Firm, who also represented some Chaori bondholders.
Gan and some investors expressed concerns about whether the bond will be fully paid, who will ultimately pay for the debt and which people are responsible for the default.
Only 1.6% of the amount provided by the new investors (Rmb17.8 million) will be paid to bondholders. Of that, bondholders owed more than Rmb200,000 will only get 20% returned. For bondholders owed under Rmb200,000, Chaori said they would be fully repaid.
In the event the 1.6% is not enough, the guarantors will step in but, even then, the reimbursement will not be enough considering the size of the bond.
The existence and role of the gurantors was not mentioned in the proposal, which caused some anxiety among bondholders owed more than Rmb200,000.
“The company’s proposal was very vague,” said Gan. It caused confusion and left a hole in the plan, said the lawyer.
Investors also questioned the background of the investor consortium and the guarantors.
According to public information, most of the nine investors are limited partnership funds that were set up or upsized recently. The sources of their capital can’t be easily traced.
One source close to Chaori said some of these funds are related to one of the two guarantors - China Great Wall Asset Management, a wholly state-owned financial management company.
This means the investors and one of the guarantors could be private in appearance but could actually have ties to the government.
Investors could therefore still believe China’s government will step in with its implicit financial markets guarantee, which involves a state-backed bailout.
This would be a shame because there had been hopes that a first bond default would break this implicit guarantee, thereby helping normalize China’s bond market.
More needs to be done about Chaori, its sponsor and Pengyuan, the rating agency on the bond, said market observers.
Chaori issued the bond in March 2012, a week after it pre-announced net profit of Rmb82 million. However, in April, the company announced a loss of Rmb58 million.
Pengyuan Rating rated the note AA and cut it to CCC after the company announced its failure to pay interest. In August 2013 the agency received a warning letter from the Shenzhen bureau of China Securities Regulatory Commission but no further investigations or fines were conducted after that.
“We call for more attention from the regulator and hope it can protect investors’ interest,” said Gan.
For China’s bond market, the solution to Chaori’s bond default does not provide closure; it’s just the beginning.