Commentary on Political Economy

Monday, 20 April 2020

Coronavirus Gives China Inc. Cover to Behave Badly
Now there’s an excuse to flout good governance practices.
April 20, 2020, 8:30 AM GMT+10


Photographer: Nina Leen/The LIFE Picture Collection via Getty Images
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

The coronavirus may have upended life as we know it, but one thing hasn’t changed: Companies looking to flout good governance practices will find a way. Now they have the perfect cover — and once again, China is leading the way.
While online investor meetings are becoming standard, HNA Group Co. took the practice to the extreme last week. On Tuesday, the disgraced airline-to-insurance giant hastily called a meeting for an onshore 390 million yuan bond ($55.1 million) due the next day, asking for an emergency one-year extension at 6:30 p.m. — prime time for family dinner — and telling participants they must submit documents within 30 minutes to qualify for e-voting. All votes had to be in by 9:30 p.m., the company instructed by email.
The short notice triggered a public firestorm. HNA has since apologized, with the new government-appointed chairman blaming the company’s finance department for the botched meeting.
But the damage is done. HNA got its due date extended and even managed to convince investors that it only needs to pay the loan prime rate — the benchmark given to banks’ best corporate clients — for newly accrued interest payments. HNA is by no means such a customer: Its $200 million dollar bond due October 2021 is yielding 28%. In addition, the conglomerate waived its 10-day written notice requirement, allowing it to call investor meetings anytime, anywhere. It’s no surprise that HNA’s other bonds sold off, too.
Other potential governance breaches may be more difficult to avoid. Companies could have trouble updating their financial information during a lockdown, especially if their offices are closed. Last week, Fitch Ratings Inc. withdrew its assessment of Yunnan Metropolitan Construction Investment Group Co., a local government financing vehicle, because the agency no longer “has sufficient information” and the company “has stopped participating in the rating process.” Its $800 million dollar bond due April 2022 tumbled to trade at 75 cents on the dollar.
Yunnan Metropolitan is a good example of the risks investors take with one-time issuers. While such borrowers need investment-grade ratings when they launch their bonds, all bets are off once cash is in the coffers. Having no rating at all could well be better than sinking into junk territory. In late March, Fitch downgraded Yunnan Metropolitan to BBB- with a negative outlook. Chances are, more cuts are on the way: The investment vehicle has 66.7 billion yuan due this year, and generated only 5.1 billion yuan gross profit in the first nine months of 2019.
Consider, too, the problems that unfold when auditors face travel restrictions. In normal times, companies have to submit audited annual reports and first-quarter results, which are unaudited, by the end of April. Now, companies have until the end of June to submit their yearly write-ups. So far, just about 30% of A-share listed companies have filed their 2019 materials, data compiled by Bloomberg show. A few distressed names even claimed they didn’t have the money to pay their auditors.
This is dangerous, because investors could be trading on a lot of self-reported data for an extra two months. According to Chinese news outlet Caixin, Luckin Coffee Inc. only disclosed that it may have fabricated billions of yuan in sales after Ernest & Young LLP started asking questions. Audits are time-consuming, but essential.
Social norms may be changing in the coronavirus era. Let’s not forget, though, that stocks and bonds are still trading. This means even if you’re engaged in e-learning, school rules still apply, students must be diligent and teachers need to be able to grade homework. Good corporate governance, I am afraid, is becoming as distant a concept as the classroom.

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