Exclusive: Founder Warns of ‘Extremely Tight’ Liquidity After Bond Default

Chinese industry and investment conglomerate Peking University Founder Group Co. is facing “extremely tight” cash flow after missing a bond payment and is seeking strategic investors for a restructuring, the company said.

Founder, which is 70% owned by Peking University, rocked the market Monday by failing to repay a 270-day, 2 billion yuan ($285 million) bond. Founder’s default underscored financial strains squeezing Chinese businesses amid slowing economic growth. About 45 companies defaulted on 120 bonds involving 102.9 billion yuan as of mid-October, Bloomberg data show.

The default also escalates concerns about the weak finances of debt-laden business arms of Chinese universities. The company and Tsinghua Unigroup Co., a top chipmaker run by archrival Tsinghua University, have been under the spotlight in recent months following a tumble in their dollar bonds.

Founder’s management held a conference call Tuesday pledging to raise funds to repay investors within a 15 business-day grace period.

Founder’s trouble surprised the market as the company’s latest financial report showed that it had net assets exceeding 60 billion yuan, including 45 billion yuan in cash as of the end of September.

But company executives said Tuesday that about 26 billion yuan of the cash was restricted funds including advance payments and margins, while an additional 14 billion yuan belongs to its listed subsidiaries Founder Securities and China Hi-Tech Group Co. and can’t be used by the parent.

A source from asset manager China Cinda Asset Management Co. told Caixin that Cinda loaned 8 billion yuan to Founder in early October with Founder’s stake in Minzu Securities as collateral. Founder executives confirmed the loan at the Tuesday conference but said the money has been fully used and the company still faces an average of 10 billion yuan of loan maturity every month, making its cash flow “extremely tight.”

The company is in talks with banks to reduce interest rates on existing loans and has won support from many institutions, according to Founder executives.

A company financial report showed that Founder had total liabilities of 303 billion yuan as of the end of September. That included 160 billion yuan of interest-bearing liability, Deputy President Li Shengli said Tuesday.

A bond market expert said Founder stepped up fundraising through bond issuance over the past three years, and many of the borrowings involved structured issuance, in which a bond issuer buys a portion of its own offering to inflate the issuance size and attract investors.

Structured issuance is known as a creative way for some companies to secure funding they couldn’t otherwise obtain based on their credit ratings. Although such practice isn’t technically illegal, some top regulators have voiced misgivings.

A Caixin calculation based on market information showed that Founder has 23 outstanding bonds worth 34.5 billion yuan on the domestic market, along with an additional $3.2 billion of dollar bonds issued abroad.

Market investors have shown growing concerns over Founder’s worsening debt woes. Company reports showed that from 2016 to 2018, Founder’s overall debt-to-asset ratio climbed from 76.8% to 81.8%. The ratio further rose to 82.8% by September this year.

Founder management attributed the worsening financials to graft scandals involving some of the company’s former executives and its long-running business disputes with Beijing Zenith Holdings, a property developer controlled by fugitive businessman Guo Wengui.

Founder claimed 14 billion yuan of unpaid receivables from Beijing Zenith, which the company expected to be recovered in the first half this year but which wasn’t, according to Zhu Yuhai, Founder chairman.

“It also caused the current trouble,” said Zhu at the Tuesday briefing. Zhu added that the company’s business operations including financial services, real estate, health care and advanced manufacturing, have maintained stable profits.

Founder has reportedly been working on a restructuring plan that will introduce new strategic investors as part of Beijing’s call to reform the ownership of university-backed enterprises.

Caixin learned in June 2018 that several central government-owned enterprises including China Communications Construction Co., China Everbright Group, Citic Group and China Chengtong Holdings Group Ltd. expressed interest in investing in Founder. But none of the deals moved forward.

In April, Thai conglomerate Charoen Pokphand Group launched a due diligence study on a potential investment in Founder. The study concluded in July and valued Founder at 6.9 billion yuan. In late September, Charoen Pokphand proposed to buy 55% of Founder for 4.3 billion yuan, according to documents viewed by Caixin. No further update of the deal has yet been made public.

Earlier this month, media reported that Founder may invite state-owned Zhuhai Huafa Group as a strategic investor. Company executives Tuesday denied the report but said the company has contacted many state-backed institutions as potential investors, including the state-owned asset administrator of Zhuhai.

Founder is in intensive communication with potential partners and seeking to introduce large centrally owned enterprises as strategic investors, said Xiao Qun, chairman of Beijing Peking University Asset Management Co., a wholly owned unit of Peking University and the controlling shareholder of Founder.

Contact reporter Han Wei (weihan@caixin.com)

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