Investors Run Into Trouble With Chinese Deals

By Ellen Sheng
FROM THE WALL STREET JOURNAL ASIA

Investors are losing money on a number of private investments in Chinese companies, as projections that seemed like sure winners three or four years ago run into trouble. These investors purchased traditional bonds and bonds convertible into stock ahead of expected initial public offerings and rich stock-market valuations. The market for private offerings of high-risk, high-yield debt and convertible bonds in sia took off in !""# and !""$, backed by strong demand from hedge funds. %eal watchers say the reasons behind the stumbles vary, but together they show that investments in China and other parts of sia might be riskier than default figures suggest. &osses can be tough to track because many such deals aren't reported and involve investors that generally keep their cards close to their vests, such as hedge funds and private-e(uity firms. &i(uidator firm )orrelli *alsh says more than half of ++ Chinese companies listed in ,ingapore that sold convertible bonds from !""- to !"". are now unable to repay their debts. Their ranks include China /ilk 0roducts 1roup &td., %elong 2oldings &td. and Celestial 3utri4oods &td., which have all disclosed their problems to ,ingapore 5xchange officials. The troubled companies together issued at least 6$"" million in convertible debt, according to %ealogic. Investors aren't willing to convert bonds into stock because the current share price is below the conversion price for the bonds and would saddle them with a loss. ,ome of those companies are involved in payment talks with bondholders. nother example is China ,un )io-Chem Technology 1roup Co., which was delisted by the ,ingapore 5xchange this year after 0ricewaterhouseCoopers couldn't verify the existence of bank and trade-receivable balances worth 7!7 million yuan 86+9$ million at current exchange rates:. The company has since been trying to repay investors in its 6+"" million convertible bond, which was handled by ;.0. /organ Chase in !""#. sia's default rate on public, speculative-grade corporate bonds was -.7< last year, according to ,tandard = 0oor's, lower than the 7.!< global rate and the +".7< rate for the >.,. )ut deal watchers say the figure would be higher if the region's private placements were included. The number of companies unable to pay their debts prompted the ,ecurities Investors ssociation of ,ingapore to ask the Chinese government to discipline some companies, because ,ingapore doesn't have the authority to do so. The association has been talking to )eijing authorities this year, though it's unclear which companies they are discussing or what the disciplinary measures could be. ?In China, the number of ways a deal can go wrong is very broad and very high,? said %avid 0atrick 5ich, a partner at law firm @irkland = 5llis in 2ong @ong. 0roblems can range from lower customer demand for products to problems with founders to overoptimistic projections. ?I've never seen a deal fail for the same reason in China,? he said. number of the stricken companies are smaller to midsiAe firms that don't have the financial backing enjoyed by larger firms. In one pre-I0B deal gone awry, 2unan TaiAinai 1roup, a Chinese dairy products producer with backing from >.@. private-e(uity firm ctis/organ ,tanley and 1oldman ,achs 1roup Inc., went into li(uidation this year. /organ ,tanley, for one, has written off its >,6+million investment. The company also owes creditors including Coyal )ank of ,cotland 1roup 0&C, ,ingapore's %), 1roup 2oldings and Citigroup Inc. at least 9"" million yuan.