International investors who own Chinese dollar-denominated bonds are on high alert.
The bankruptcy and restructure of Peking University’s Founder Group, a Chinese state-backed technology conglomerate, currently playing out in Chinese court could upend the entire offshore dollar bond market.
At the heart of the issue are so-called “keepwell” deeds, a quasi-guarantee issued by Founder Group designed to protect foreign investors who invested in bonds issued by Founder’s offshore subsidiaries. But this structure is being challenged in court as part of Founder Group’s restructuring proceedings. The company’s administrators overseeing its bankruptcy are looking to tear up such “keepwell” bonds.
If the Beijing court deems the provision—akin to a “gentlemen’s agreement”—as non-enforceable, more than $100 billion of offshore dollar-denominated Chinese bonds would suddenly be worth a lot less than before.
And foreign investors could stand to lose most if not all of their investments.
High Profile Bankruptcy
Founder Group is owned by Peking University and engages in technology services, healthcare, real estate, and securities trading. It’s one of a handful of conglomerates owned by China’s high-profile research universities.
It began having financial difficulties late last year when it missed payment on a 2 billion yuan ($280 million) onshore bond. Founder’s default on its onshore bonds initially shocked investors, since it was rated AAA (the highest possible credit rating) by domestic Chinese credit rating agencies. Ostensibly, Founder’s lapsed payment was part of a larger trend of Chinese bond defaults during 2019.
Creditors of the company then extended the deadline for payment until February 2020. In February, as the CCP (Chinese Communist Party) virus began to ravage much of China, creditors had asked a Beijing court to restructure Founder Group through bankruptcy proceedings. According to a report by Chinese business magazine Caixin, as of February, Founder Group had 34.5 billion yuan ($4.8 billion) in outstanding onshore…