Lost in translation?

IFR 2086 6 June 2015 to 12 June 2015
7 min read

IT IS QUITE possible that the name Bluestar means nothing to you – but if it does, it will stay with you for the rest of your career. China National Bluestar Corp, the speciality chemicals producer, last week became the first issuer in a long time to cancel a bond deal after it had been launched and allocated.

The reason appears to have been that the keepwell agreement which had been provided was in conflict with an existing keepwell. With incomplete and conflicting documentation, the lead managers were forced to advise the issuer to cancel the deal. A new, weaker keepwell was issued and the transaction, a two-tranche US$1bn deal, was relaunched with substantially wider spreads on offer.

Whether the lead managers and – especially – the lawyers have egg on their face on the back of this highly unusual cancellation, or whether they were dealt a rum hand by the issuer is only for them to know.

As it happened, this deal had already caught my eye ahead of the cancellation as it was yet another example of the ever-increasing number of bonds issued by Chinese borrowers in the US dollar market which come with news of substantially oversubscribed books but which then fail spectacularly to make any headway in the aftermarket.

I have been hanging around the bond markets for far too long not to feel a little uncomfortable with the explosive increase in bonds issued by Chinese corporations. Please don’t get me wrong, I am not against the expansion of the universe of issuers, but I struggle to see how Western investors can get their arms around all these new names, the businesses they are in and the way they conduct those businesses.

SOME YEARS BACK, I sat as a non-executive director on the board of an automotive group in which I had a not insubstantial financial interest. Executive management was very excited about the many contracts it had signed with Chinese suppliers and clients. The chairman, also non-executive, warned management not to be too gung-ho, for he had experience of doing business in China. Agreements and even contracts meant nothing if the counterparty decided to change its mind and walk away – and that, in his experience, was not at all uncommon. In the event, that is what occurred and the company in question did not survive.

At the time, there was much disappointment and upset but, as the chairman said, they had been warned. It was not, so we concluded, that Chinese business practices were any better or worse; they were just very different and the problem is that we had become so ossified ourselves in terms of how we dealt with business situations that we struggle to adapt to other ways of doing things.

Let’s not forget that we used to do business on a “My word is my bond” basis, which stood us in (relatively) good stead, until the Americans arrived in the City in numbers in the 1980s. We soon found that until a Yank had turned up to a meeting with his lawyer, his accountant and most probably his pensions adviser too, it didn’t matter how many times he said “Yes”, “Sure” and “Definitely”. Words are cheaper than lawyers.

It was a different ethic and one which we needed to get used to. Thus, as I have repeatedly noted, our bond prospectuses have ballooned from 30 pages to 300 pages – or even 500 pages – even though the basic bit about how much, for how long and at what rate hasn’t changed.

How can a bond with a book of US$6bn against issuance of US$1bn so radically fail to perform?

IN CHINA, WE are dealing with a people and a culture significantly more alien to ours than that of our transatlantic cousins with whom we are already prone to have our difficulties. Not only that, but we are also dealing with issuers we don’t really know, a local investor base we can’t predict and a local legal system about which we have next to no clue. Many Chinese business leaders are of course US-educated but the way they act when working outside their home country and how they act when within it might well prove to be quite different.

In other words, we are trading around Chinese corporate credits as though they were the same as European or American ones, just in a different time-zone.

In other words, when dealing with Chinese borrowers, there is – next to conventional credit risk and interest rate risk – also a cultural risk which cannot really be priced. How often, for instance, have we seen the phenomenon which brought my attention to Bluestar? How can a bond with a book of US$6bn against issuance of US$1bn so radically fail to perform? There are evidently forces at play in that part of the world which we, locked into our American led-GAAP and CFA way of thinking, don’t fully grasp.

Having always been one to knock at the door of syndicate desks to see whether anybody is awake, I feel no need to beat them up for what could have been a minor fiasco in the case of the cancelled issue for Bluestar. The deal was pulled, the docs were redone and the issue was relaunched on Thursday without any fuss. Even accounting for the weaker documentation, the uplift in coupon was generous, with the three-year tranche being repriced from plus 220bp to plus 250bp and the five-year from plus 235bp to plus 270bp.

The banks concerned at least dealt with the budding fiasco in a cool and determined manner. But whether the problems they faced are an unfortunate one-off or whether we might in the future find more deals where something appears to have been lost in translation – and I don’t just mean in the language – remains to be seen.

Anthony Peters