Bonds Apr 16

HNA bond ploys hurt firm and market, paper says

Last-minute meeting to extend bond issue stirs anger; research group says 'regulators cannot ignore such incidents'

HNA bond ploy hurt firm and market, paper says  
A controversial tactic to get around a bond default by HNA has the Chinese financial press in uproar. File pic by AFP.

(ATF) HNA’s last-minute reprieve to stave off a bond default, reported yesterday by ATF, has the Chinese financial press in uproar. Understandably, HNA – Hainan Airlines – has been in tremendous difficulty due to the coronavirus, but it stretched the newly minted Securities Law by basically calling a 5-minutes-to-midnight bondholders' meeting to get a one-year bond suspension.

Under the new Securities Law the tactic of getting a majority of bondholders to agree to changes is viable, but HNA’s tactic was described as an “assault meeting” by Xinhua. HNA’s follow-up letter of apology was also met with derision.

Due to the coronavirus there was no on-site meeting or written votes as a telephone conference and online voting were conducted instead.

Tonghuashun Financial Research Center said: “It is not impossible under the premise of ensuring fair procedures and the true expression of the holders' opinions. However, the epidemic has not lasted for a long time, and HNA's financial difficulties are not unexpected. But after a chaotic half an hour meeting HNA’s integrity is left behind and rules are broken at will.

"It will attract people to follow suit, and the transaction costs of the bond market will be extremely high, making it difficult to operate normally and healthily, and even those companies that abide by the rules will suffer. Therefore, regulators really cannot stand by with such incidents.”

The “Series 13 HNA Bonds” involved in this turmoil is a AAA public offering bond issue that was launched on April 15, 2013, with an issuance scale of 1.15 billion yuan, a maturity of seven (5 + 2) years, and a coupon rate (current) 7.1%. After the bond was exercised by the holder in April 2018, the current bond balance is 390 million yuan. It is understood that as of April 9, the size of the "13 HNA Bonds" in both the interbank market and the exchange market was 195 million yuan, according to Xinhua.

HNA bonds plunge

Despite HNA's apology, the market voted with its feet yesterday. The "13 HNA Bond" and its brother the "15 HNA Bond" plunged more than 23% after the market opened, and at one point fell 36%. It was temporarily suspended twice, but the closing decline narrowed to 25.75%. According to statistics, there were 86 transactions throughout the day, with an amount average of 324,900 yuan.

According to statistics, in addition to the "13 HNA Bonds", there are currently seven outstanding HNA bond stocks with a scale of 14 billion yuan. They are 19 HNA 01, 19 HNA 02, 19 HNA 03, 19 HNA 04, 16 HNA renewable HNA debt 01, 16 HNA renewable debt 02, 15 HNA debt.

Another 'bad boy'

First Finance reported that HNA was not the only "bad boy" of the bond markets. Prior to this, Zhongrong Xinda Group also used off-site redemption to avoid bond defaults. Unlike HNA,  Zhongrong Xinda did not chose to postpone payment, but to lower its bond interest rate, reducing the rate from 7%-8% to 3%-4%.

March 2 was the date when interest was due to be paid for “18 Zhongrong Xinda MTN001”. On the evening of the same day, the Shanghai Clearing House announced that no funds for interest payment had been received from Zhongrong Xinda. 

Subsequently, the relevant person in charge of Zhongrong Xinda said in an interview with the media that the company recently held a meeting of bondholders to review the off-site redemption proposal, and all investors unanimously agreed to the proposal. Subsequently, “under the guidance of relevant departments,” the off-site redemption of interest was a fait accompli, so the mid-term note did not default.

The so-called over-the-counter redemption means that the company directly pays the interest funds to investors, and no longer passes through the clearing house. As for why the interest payment and redemption of this bond should be turned off-site, the above-mentioned person in charge explained this was done mainly to negotiate with investors to reduce interest – to reduce the company's financing costs, avoid default, and protect the holder's rights and interests.

There have been several other similar cases. Investors hope that regulators will step in to deter this type of behaviour.