Gemdale Sparks Investors’ Ire Over Plan to Slash Bond Coupon

Shanghai-listed property conglomerate Gemdale Corp. has sparked uproar among holders of a 1 billion-yuan ($141 million) bond after it tried to slash the interest rate payable on the debt by a whopping 70%.

The company announced its intention in a filing (link in Chinese) on Monday night, saying that the coupon rate on the three-year bond, 18 Gemdale 03, would be lowered to 1.5% from 5.29% effective May 28, the second anniversary of the issuance, citing the “current market environment.”

Less than 24 hours later, after an outcry from investors who accused the company of violating the terms of the bond sale, the Shenzhen-based developer put out another statement saying it was looking into the matter and requesting that trading in the bonds be suspended (link in Chinese).

“The company is actively communicating with relevant investors and will properly handle the issue in accordance with the rules and regulations and will publicly disclose the result in a timely manner,” it said.

Regulator wades in

Gemdale also revealed in a Wednesday statement that the stock exchange had demanded an explanation for its proposal and questioning whether, under the conditions outlined in the bond’s prospectus, it had the right to cut the coupon. Although Gemdale said the terms allowed it to adjust the interest rate on the second anniversary of the bond, investors claimed that the rate could only be raised and there was no provision for a cut.

The regulator told the company to hire lawyers to provide an opinion on the legality of its proposal, and ordered China International Capital Corp. (CICC), the bond trustee and underwriter of 18 Gemdale 03, to clarify the terms of the prospectus.

A source close to the China Securities Regulatory Commission said its bond department held a meeting with CICC on Tuesday afternoon although it has not given any guidance to CICC about how to deal with the issue. A person close to CICC told Caixin the investment bank is working with lawyers to prepare responses.

In the meantime, Gemdale has already decided not to change the interest rate after regulators stepped in, people familiar with the matter told Caixin.

The bonds were issued on May 28, 2018 and are set to mature on May 28, 2021. At the end of the second year, Gemdale had an option to raise the coupon rate and bondholders had an option to sell the debt back to the company, according to the prospectus (link in Chinese). Bond industry sources told Caixin that there was no option allowing Gemdale to lower the interest rate.

Big debts

Gemdale has loaded up on debt over the past few years to fund its expansion and buy land. As of end-December 2019, its interest-bearing liabilities totaled 94.8 billion yuan according to its latest earnings report (link in Chinese), 15.4% higher than a year earlier, while the average cost of its debt financing was 4.99%, up from 4.83% in 2018. It currently has 35 bonds traded on the domestic market with a combined face value of 43.7 billion yuan. In 2019, the company reported a net profit of 10.1 billion yuan on revenue of 63.4 billion yuan.

Market interest rates have fallen in China as the central bank has cut benchmark lending rates to help companies weather the economic slowdown and the impact of the coronavirus epidemic. That’s had a knock-on effect on bond yields. Data from Moody’s Investors Service show that coupon rates on high-yield bonds issued by property developers fell to an average of 4.6% in March from 6.9% in the third quarter of 2019.

Several companies have lowered the coupon rates on their bonds amid the coronavirus outbreak to cut interest payments as they try and conserve cash. A source familiar with the matter said there were around 70 companies that had slashed their coupon rates recently.

Gemdale said in its Monday statement that it was seeking to lower the coupon rate because of the “current market environment” and a bond investment manager with a brokerage told Caixin the company’s plan was aimed at persuading bondholders to sell the bonds back to the company, which would save an estimated 37.9 million yuan in interest payments.

Contact reporter Tang Ziyi (ziyitang@caixin.com) and editor Nerys Avery (nerysavery@caixin.com)

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