China’s $862 Billion of Dollar Bonds Face Key Restructuring Test

A first-of-its-kind debt restructuring in China’s $862 billion market for corporate dollar bonds is underscoring risks global money managers face from complex pledges underpinning many of those securities.

Peking University Founder Group Corp., a business arm of the elite academic institution, won approval from creditors late last month for a debt resolution proposal. It marks the first major case where a Chinese state-linked firm addressed its onshore creditors and offshore bondholders in a single restructuring plan.

But the amount of money that those broad groups of investors may expect to recover differ. Much of that comes down to a structure called keepwell deeds used in over half of the company’s $3 billion of dollar bonds. That’s essentially a gentleman’s agreement that commits to maintaining an issuer’s solvency while stopping short of making any payment guarantee.

China’s $862 Billion of Dollar Bonds Face Key Restructuring Test

Fund managers from New York to Hong Kong are watching the Founder case, which could set a precedent for how such structures are handled when borrowers stumble. About $109 billion of Chinese offshore bonds outstanding, or around 13% of the total, have keepwells. They’re facing scrutiny as authorities let more firms fail, to encourage the market to price risk better. Turmoil at China Huarong Asset Management Co. has added to concerns, as most of its dollar debt has such provisions.

Founder Group is one of only several state-linked Chinese firms to have defaulted in the offshore bond market since late 2019 when Tewoo Group Co. became the first such major defaulter in two decades.

The two groups of investors in Founder aren’t on the same footing though. Some offshore creditors have gone to court to demand payment, and others have fewer options for repayment than onshore creditors.

Peking Founder and the restructuring administrator didn’t respond to requests for comment.

Of Founder’s about $3 billion of offshore notes, five securities with face value totaling $1.7 billion carry keepwells.

Here are more details of the keepwell bonds:

AmountIssuerGuarantorKeepwell providerRecent prices
$490m due 2020Kunzhi Ltd.Founder Information Hong KongPUFG8 cents on the dollar
$310m due 2021Kunzhi Ltd.Founder Information Hong KongPUFG8 cents
$300m due 2020Nuoxi CapitalHongKong JHCPUFG22 cents
$200m due 2021Nuoxi CapitalHongKong JHCPUFG22 cents
$400m due 2023Nuoxi CapitalHongKong JHCPUFG20 cents

The company’s administrator last August rejected recognition of investor claims on the keepwell notes. Since then, some of the investors, left out of the restructuring plan, have initiated legal action offshore to seek better recoveries.

Two claims seeking at least $1.82 billion were filed last month in a Hong Kong court against Founder Group for alleged failure to make good on keepwell securities.

Meanwhile, investors are also seeking to liquidate unit Founder Group (Hong Kong) to which another unit called Nuoxi Capital granted nine loans, according to a court filing. Nuoxi Capital is the entity that issued a number of the keepwell notes.

Winning court backing on such bonds wouldn’t be without precedent. In November 2020, a court in Shanghai recognized a previous Hong Kong court’s ruling that validated the keepwell agreement attached to CEFC Shanghai International Group Ltd.’s euro-denominated securities.

Of course it would be easier to avoid court cases in the first place. And the holders of the offshore notes that have guarantees rather than keepwells may get to avoid that trouble.

These notes have been recognized by the administrator and allocated the same payout ranking as onshore unsecured creditors, unlike the keepwells. The bonds are all guaranteed by Founder Group or unit Peking University Resources Group. While that hasn’t kept the bonds from trading at distressed levels, the market is at least pricing them above the keepwells.

Here are more details of those securities:

AmountIssuerGuarantorRecent prices
$250m due 2021Nuoxi CapitalPUFG40 cents
$300m due 2022Nuoxi CapitalPUFG41 cents
$350m due 2022Nuoxi CapitalPUFG41 cents
EUR80m due 2021Nuoxi CapitalPUFG41 cents
$350m due 2020Dawn Victor

Founder Information Hong Kong,

Peking University Resources Group

36 cents

Still, even the holders of these bonds have fewer repayment options than onshore creditors. The domestic investors can opt for a cash only option, a combination of cash and debt to equity swap, or debt retainment in addition to cash payment.

In contrast, the holders of offshore guaranteed bonds can only go with the cash-only settlement via a trustee, Bank of New York Mellon, according to notices to such holders.

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