Established in the 1990s, Founder has expanded into every business imaginable. The company had 23 onshore issues outstanding as of early December, when it first missed a payment, with two-thirds, or 24 billion yuan ($3.43 billion), due over the next year. Its $300 million dollar bond due this April is trading at 33 cents on the dollar.
While restructuring can be painfully slow in China, a speedier process isn’t necessarily good news for Founder’s dollar investors.
So far, distressed state-owned enterprises have treated foreigners with kid gloves, trying to settle their offshore bills before slaughtering traders onshore. Bohai Steel Group Co. made good on an offshore bond in 2017 after defaulting onshore a year earlier, and only started restructuring last year. While commodities trader Tewoo Group Co. in November became the first SOE since 1998 to not pay offshore investors back in full, it still offered something. Qinghai Provincial Investment Group this month agreed to pay out three dollar bonds, although some with as little as 37.65 cents for every dollar of debt: 54% of its investors accepted.
For those Qinghai investors who complained they were “treated as beggars,” just wait and see what happens with Founder. With this restructuring, suppliers and banks will be the first in the pecking order, not offshore bond investors. Take a look at who’s on Founder’s all-star restructuring team: the People’s Bank of China, various banking regulators and the Ministry of Education — the ultimate parent of Peking University. Banks will get their money back before everyone else.
It’s about time the government stepped in. Just like HNA, which is on the verge of a takeover, Founder’s painful drama has been dragging on for too long. The company has had trouble getting much-needed capital injections from fellow SOEs because its ownership and state links are unclear. It’s also mired in a legal battle with fugitive businessman and social media sensation Guo Wengui, persona non grata for aspiring SOE bosses.
Li You was Founder’s CEO until 2015, when he was arrested for insider trading involving Guo. The executive was given a four-and-a-half-year sentence and fined 750 million yuan. In a series of pending lawsuits against Peking University, Li and his associates, who currently own 30% of the conglomerate, now claim they should have control of the company. Meanwhile, Founder said a property developer controlled by Guo owes it 14 billion yuan in unpaid bills. A court-ordered restructuring would wipe out all equity-holders’ rights — not to mention air their dirty laundry.
No doubt, the coronavirus outbreak could be a black swan that drags China Inc. further into a liquidity crisis. But at least investors are now psychologically prepared for a drastic economic slowdown, defaults and bankruptcies. Beijing might as well use this opportunity to clean out its closets.
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Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron’s, following a career as an investment banker, and is a CFA charterholder.
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