Shanghai Chaori Solar Energy Science and Technology’s restructuring plan has left few options for bond investors, who may still face a big loss in the company’s bond default.
Shenzhen-listed Chaori Solar, which in March became the first Chinese company to default on its onshore corporate bonds, unveiled a solution on Tuesday for its bond’s principle and interest payments.
In March, Chaori failed to pay all of the Rmb89.8 million interest on the Rmb1 billion five-year bond it issued in 2011. It also failed to hold a bond investors meeting to decide whether to restructure the company and/or sell some of the collateral backing the defaulted securities, due to a lack of investor attendance.
The company’s moves have been watched closely by the market because this first default should provide a template for resolving similar issues.
“There is no precedent for such a situation so Chaori’s solution is [very] exploratory,” said Christopher Lee, head of corporate ratings for Greater China at Standard & Poor’s in Hong Kong.
The company plans to sell a controlling stake to a consortium of nine investors, led by Jiangsu Golden Concord, for Rmb1.46 billion ($237 million). Together with the minimum amount of Rmb500 million raised by the company itself, Chaori will have Rmb1.96 billion with which to repay its debts, according to a company statement.
The company proposed to fully pay back employee salaries, taxes and debts that are backed by collateral and under Rmb200,000.
The good news is that Chaori’s employees and smaller creditors (with less than Rmb200,000 investments) can be fully paid and the company can remain operational while preserving its listing status.
The fact that the nine investors are all privately owned firms also implies the Chinese government may not want to break the implicit guarantee inherent in China’s financial market.
However, some market observers regard the restructuring plan as highlighting a lack of protection for bondholders.
The company had to pay a total of Rmb1.09 billion to bond investors as of March. However, only 1.6% of them (Rmb17.8 million) can be fully paid in priority and the rest will be regarded as common claims, which can only be paid 20% for the amount that is over Rmb200,000.
“The company could definitely pay more to creditors but it won’t,” said Gan Guolong, a lawyer with Shanghai Delson Law Firm, who was also representative for some Chaori bondholders. Many retail investors have put a lot of money, more than Rmb200,000, in the bond but will get back so little if the restructuring plan is applied, said Gan.
Also, the two bond guarantors the company would bring in — China Great Wall Asset Management and Shanghai Jiuyang Investment Group — will not help as much as people think.
In a separate announcement by the company, the two guarantors will offer a total Rmb880 million guarantee with an effective deadline of December 31 this year. The guaranteed amount doesn’t cover the whole bond debt, and the guarantors didn’t clarify whether the money will pay for those common claims that is over Rmb200,000 in full.
“They will only offer guarantees for investors on part of Chaori’s bond debt based on certain terms,” said Gan.
However, if bondholders reject the plan, they may have less hope to get money back.
According to the company’s announcement, Chaori will declare a bankruptcy if its restructuring plan fails to get creditor approval. “If the company goes into the liquidation process, it will take a long time to settle the issue. And investors may even get less in the [end],” said S&P’s Lee.
The recovery ratio of common claims is 3.95% if Chaori declares bankruptcy, the company said in the proposal.
Some bondholders still bet that the government would step in. “We call for more attention from the regulator and hope it can protect investors’ interest,” said Gan, pointing out that no management or deal sponsor has been fined for providing misleading information.
China’s corporate debt market had a size of $12 billion at the end of last year and has overtaken the US as the world’s largest issuer of corporate debt, according to S&P.
Chaori’s creditors will vote on the plan on October 23.