China University-Backed Firm Mired in Debt Woes, Identity Crisis
(Bloomberg) -- A Chinese chip-maker leading Beijing’s campaign to achieve global dominance in technology is facing a loss of confidence from its bond investors. Tsinghua Unigroup Co.’s notes plunged recently amid concerns over its ballooning debt pile and uncertainty over the strength of state support for the university-backed business.
What’s the company:
Founded in 1988, Tsinghua Unigroup is a business arm of Tsinghua University, the country’s top tertiary institution that counts President Xi Jinping as an alumnus. The company swung into a net loss of 631 million yuan ($90 million) last year, from a net profit of 1.06 billion yuan the previous year.
Frenzied business expansion fueled by borrowings pushed its debt-to-asset ratio to 73.4% last year from 62.1% in 2017 and 59.1% in 2016, respectively. It has 64.1 billion yuan of onshore and offshore bonds outstanding, according to Bloomberg-compiled data.
Investors have dumped Unigroup’s dollar bonds at least twice since 2018 as failed attempts by its parent Tsinghua Holdings Corp. to sell its ownership drew concerns about the unit’s future. The latest sell off happened in the week ended November 1 amid the company’s plan to extend its loans. It dragged its 2023 dollar bond price to a record low.
The company’s finances have deteriorated sharply in the last three years after embarking on a borrowing spree to fund takeovers and other investments intended to boost its position in the chip industry.
Despite a directive from Beijing for schools to distance themselves from business endeavors, Unigroup executives said the company has received support from the country’s top leadership to maintain its ties to Tsinghua University for now.
Why does it matter:
The recent bond rout that hit Unigroup, accompanied a sell off in Peking University Founder Group’s notes, a fellow issuer controlled by the university’s archrival. This has shed light on the risk arising from an obscure and lightly regulated corner in China’s corporate world.
Despite receiving billions in funds from state-backed lenders and investors, the identity and status of university-linked businesses remains ambiguous. The fact that they are ultimately supervised by China’s Ministry of Education, instead of the powerful state asset administrator that oversees state-run enterprises across the country, makes the exact level of financial backing from Beijing questionable. A government plan announced last year to clean up commercial assets run by universities and colleges only aggravates such concerns.
Another potential fallout could be a loss of confidence in companies such as Unigroup that are pivotal in Beijing’s technology race with the U.S., an increasingly crucial imperative as the trade war rumbles on.
What does the company say:
In an attempt to soothe investors, Unigroup executives said earlier this month that the firm has more than 17 billion yuan of cash in the offshore market, as well as credit lines of 250 billion yuan.
Tsinghua Unigroup’s board secretary office didn’t reply to an email seeking comments.
What do ratings companies say:
China Chengxin Securities Rating Co., a local debt risk assessor, maintained Unigroup’s AAA label in June but highlighted its fast debt increase and large future capital spending needs. The company isn’t rated by any of the three major international credit rating firms.
What are traders watching next:
Unigroup’s parent Tsinghua Holdings said earlier this week that it will cut its stake in Tus-Holdings Co., another subsidiary that runs the world’s largest university science park. It remains unclear whether the fundraising exercise was simply designed to heed Beijing’s call on universities to separate academia from business or meant to boost its cash buffer in the wake of Unigroup’s financial woes.
Next year will bring fresh challenges: Tsinghua Unigroup needs to honor repayment on 8 billion yuan worth of local bonds and $450 million of dollar bonds, respectively, according to data compiled by Bloomberg.
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