'Wilful default' bond spat can shake Hong Kong

XJ International Holdings

05/04/2024 12:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Anshuman Daga
       SINGAPORE, April 5 (Reuters Breakingviews) - Defaults in
China's dollar bond market are nothing unusual these days. It's
rarer to find issuers who seem able but unwilling to pay their
debts. That's exactly what bondholders in a Hong Kong-listed
company are upset about.
    Creditors including Asia-based buyout firm PAG and other
larger funds say a "wilful default" occurred in March when XJ
International  1765.HK , one of China's biggest private higher
education providers, failed to meet a request for an early
redemption on a $315 million zero-coupon convertible bond issued
in 2021.
    The group, representing 49% of the principal amount, note
XJ's "strong financial position". The company issued the bond at
a time President Xi Jinping was criticising the private
education sector but before restrictive new rules pummelled
share prices in the broader industry. Revenue at the company
which runs 24 colleges, including in Southeast Asia, rose 18% in
the year to August and adjusted net profit was up 15%. It held
$405 million of cash and cash equivalents too. 
    It's a tricky situation. The bondholders say XJ made
"misleading statements" to the Hong Kong exchange and changed
its name from Hope Education in an attempt to distance its brand
from the default, claiming the company's behaviour is
"unprecedented" in their 20-year experience of engaging with
Chinese corporates. XJ hasn't publicly responded to the
creditors' allegations.
    Ultimately, proving 'wilful default' is difficult but the
winding up petition may help the creditors get XJ to the
negotiating table ahead of a June court hearing. 
    It puts Hong Kong's authorities in a awkward spot either
way; the Hang Seng Index  .HIS  has roughly halved since a peak
in 2021 and there are increasing expectations for management-led
buyouts of firms whose shares are languishing in the Asian
centre. That makes it an especially important time for
regulators to ensure companies are on their best behaviour and
aren't deliberately self-harming.
    It's a reminder too that China's offshore bond market is for
the brave. There's been a huge uptick in dollar bond defaults
led by property developers. Issuance has collapsed 80% since
2020 till last year, per LSEG. S&P Global says out of all
defaulted offshore bonds across sectors since 2015, 56% remain
unresolved. The latest spat suggests investors need to worry
about seemingly performing parts of their portfolios too. 
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    CONTEXT NEWS
    A group of creditors on March 27 filed a winding-up petition
on Chinese education services provider XJ International in Hong
Kong after it defaulted on a $315 million zero-coupon
convertible bond.
    The group, representing owners of 49.1% of the issue, said
it believed XJ "wilfully defaulted" and did so "while being in a
very strong position financially, operationally and in terms of
investor support to repay its debt in a responsible manner."
Holders had an option for early redemption at 103.04% of face
value in March.
    XJ said on Feb. 29 it was experiencing difficulty redeeming
the bond issued in 2021 and on March 6 said that a default
occurred. It is seeking viable solutions from consultants and
liaising with creditors, the company added. It has not publicly
responded to the wilful default allegation.

 (Editing by Una Galani and Katrina Hamlin)
 ((For previous columns by the author, Reuters customers can
click on  DAGA/ 
anshuman.daga@thomsonreuters.com; Reuters Messaging:
anshuman.daga.thomsonreuters.com@reuters.net))