Caixin
Nov 04, 2020 04:57 AM
FINANCE

Regulator Drops Review of Founder Securities’ Bond Issuance

Founder Securities’ shareholder structure may change under parent Founder Group’s bankruptcy reorganization.
Founder Securities’ shareholder structure may change under parent Founder Group’s bankruptcy reorganization.

China’s securities regulator terminated review of a bond issuance application by Founder Securities Co. Ltd., a decision that people close to the matter said is related to its bankrupt parent, state-owned Peking University Founder Group Corp. (PUFG).

The China Securities Regulatory Commission disclosed the decision Tuesday but didn’t offer an explanation. Founder Securities didn’t immediately respond to requests for comment.

The regulator is concerned that the brokerage, one of the core assets of Founder Group, could funnel proceeds from the bond issuance to its parent company, according to people close to Founder Securities.

PUFG is undergoing a bankruptcy reorganization after it failed to repay 2 billion yuan ($300 million) of bonds last year. The group is owned by Peking University, one of China’s oldest and most prestigious universities.

As of Aug. 19, 478 creditors reported to the bankruptcy administrator that they are owed a combined 187.9 billion yuan, according to a PUFG statement. As of November 2019, PUFG had interest-bearing debts of about 190 billion yuan, according to data reported to regulators and reviewed by Caixin.

The indebted technology conglomerate picked four strategic investors — real estate developer Zhuhai Huafa Group Co. Ltd., insurer Taikang Life Insurance Co. Ltd., state-owned Shenzhen Investment Holdings Co. Ltd. and investment company Zhongze Holding Group Co. Ltd.

Founder’s creditors originally expected a reorganization plan by November, but now the proposal will probably be delayed to around Spring Festival in February 2021 because the strategic investors haven’t turned in their investment plans, according to people close to the matter.

Founder Group holds 27.75% of Founder Securities. The reorganization could change the brokerage’s shareholder structure. Founder Securities may not get regulatory approval for bond issuance before Founder Group’s reorganization plan is finalized, the person close to the brokerage said.

Founder Securities was already suspected of funneling funds to its parent. In November 2019, the brokerage bought 230 million yuan of trust products from Citic Trust Co. Ltd., which used the proceeds to extend a loan to Founder Group. Founder Securities said it found out only in March that the proceeds weren’t used for investment as agreed, but Citic Trust maintained that the use of the funds conformed with the trust contract. The two companies eventually settled the dispute and agreed to terminate the trust contract.

In an inquiry letter in May, the Shanghai Stock Exchange asked Founder Securities to clarify whether it has used financing proceeds for other nonoperating purposes and whether there is a potential interest arrangement with related parties.

Founder Securities disclosed in its response that it bought 510 million yuan of bonds issued by Founder Group. But it said the purchase was a commercial activity and does not constitute nonoperating use of capital.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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