Caixin
Apr 06, 2021 08:44 PM
FINANCE

Shanghai Exchange Condemns Tycoon Who Fled Ahead of Bond Default

The Shanghai Stock Exchange’s public censuring of Gao Hongming and his son comes as part of broader efforts to clean up the bond market after a wave of corporate defaults. Photo: IC Photo
The Shanghai Stock Exchange’s public censuring of Gao Hongming and his son comes as part of broader efforts to clean up the bond market after a wave of corporate defaults. Photo: IC Photo

The Shanghai bourse has condemned a businessman who fled the Chinese mainland a few weeks before his company defaulted on a 100 million yuan ($15.2 million) bond, saying he displayed “a negative attitude toward resolving and dealing with bond credit risk.”

The Shanghai Stock Exchange’s public censuring of Gao Hongming and his son Gao Yuan comes as part of broader efforts to clean up the bond market after a wave of corporate defaults last year set off a financial earthquake.

Last week, the exchange issued a disciplinary penalty (link in Chinese) to Ningxia Yuangao Industrial Group Co. Ltd. as well as to the father and son, who are the company’s chairman and information disclosure chief, respectively. The bourse said that they had committed a series of rule violations, including counterfeiting official documents to guarantee bond issuances, failing to disclose information that may affect the company’s solvency and bond prices, and failing to manage credit risk around the bond default.

Gao Hongming and Gao Yuan left the Chinese mainland on Oct. 29 and Nov. 9, respectively, according to the bourse’s statement.

On Nov. 23, Yuangao failed to repay principal and interest of a 100 million yuan bond on the Shanghai bourse, triggering cross defaults on several other bonds it issued. The metal-products and wind-power equipment manufacturer was founded by Gao Hongming in Northwest China’s Ningxia Hui autonomous region in 2010, with 9.2 billion yuan of total assets (link in Chinese) at the end of June 2020.

Gao Hongming and his wife jointly ranked 923rd on the 2020 China Rich List released by Shanghai-based Hurun Report, with a 6.3 billion yuan fortune. They are the third richest people based in Ningxia, according to the list.

Sources close to the matter told Caixin that the company may have been unable to pay up due to losses incurred through so-called structured bond issuances, in which companies either buy part of their own bond issuances, or have an affiliated party do so, to artificially inflate demand for their bonds.

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Despite the looming default, the company failed to disclose in a timely manner the risk it would miss the repayment deadline, and failed to prearrange and implement a plan to mitigate risks, the Shanghai exchange said. After the default, the company failed to disclose measures it had taken or would take to deal with the situation and refused to disclose its finances and operational details to bondholders.

In addition, Yuangao on Nov. 12 applied to a Ningxia court for bankruptcy restructuring, but only disclosed this to bondholders on Jan. 5. The court accepted the application (link in Chinese) last month.

After the default, ratings agency Dagong Global Credit Rating Co. Ltd. slashed (link in Chinese) Yuangao’s rating from AA to C, and lowered the credit ratings of its bonds from AA or higher to CC or lower. The practice of credit ratings agencies only slashing ratings in the wake of a default has also come under greater scrutiny recently.

At the end of September, Yuangao had a total interest-bearing debt of 2.6 billion yuan, which included 1.6 billion of short-term debt, up 32.4% from the end of 2019, Dagong said in a November announcement (link in Chinese) based on financial results provided by Yuangao.

Yuangao’s cash on hand has declined in the past few years, from 889 million yuan in 2018, 666 million yuan in 2019, to 463 million yuan in the first half of 2020, according to its financial results. Its net profit attributable to shareholders also fell during the three periods, notching declines of 9.8%, 3.5%, and then 61.7%.

Recently, the Shanghai bourse has punished several misbehaving bond defaulters. In January, it issued a disciplinary penalty to Brilliance Auto Group Holdings Co. Ltd., parent of BMW AG’s main Chinese joint-venture partner, for violations including the transfer of assets without the permission of related parties, which raised questions whether Brilliance might have transferred valuable assets to escape debt.

Zhang Yuzhe contributed to this report.

Contact reporter Luo Meihan (meihanluo@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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