Guosen Securities denies bond default

By Staff Writer

Apr 04, 2016 01:12 AM EDT

Guosen Securities' unit has clarified that there's no default on its offshore debt. The looming uncertainty over payments raised concerns about possible default. Bank of New York Mellon (BNY), trustee of the offshore bond, had earlier warned bondholders of a possible default. Mainland groups are expected to support the borrowings by the unit of Guosen Securities.

China's eighth largest investment bank Guosen Securities has recently said that it was not nearing default threat on the offshore debt. Guosen Securities has claimed that it has assurances from mainland groups on supporting its offshore unit's borrowing plans. 

CNBC reports that the offshore bond's trustee Bank of New York Mellon has received a clarification notice from Guosen Securities correcting previous statements as no payments had yet been missed. BNY Mellon's earlier notice has warned bondholders of an event of default. Guosen Securities has clarified that technical phrases created concerns over 'keepwell agreement.'

Guosen Securities is hoping on the support from Mainland groups to the borrowings of its offshore entities in US dollars and renminbi as well. The rules framed in 2014 are allowing them to issue legal guarantees. 

Manjesh Verma, head of credit sector specialists at Citigroup in Hong Kong, said "Our base case is this technical issue will be solved. But going forward, capital control might be a risk investors should consider in assessing the 'keepwell' structure. It is an issue not only for the dim sum market, but for the broader China offshore bond markets given that there are a number of bonds in dollar and dim sum space which have this keepwell structure and this structure has not been tested yet."

Bloomberg further adds that Guosen Securities (Hong Kong) Financial Holdings Co in 2014 issued Yuan 1.2 billion ($185.7 million) bonds through subsidiary Guosen Securities (Overseas) Co. Guosen Securities (Hong Kong) is the guarantor for the bonds. The pledge of support in the offer circular from parent company is called as 'keepwell agreement.' Guosen Securities (Overseas) has issued a statement assuring that keepweel agreement continues to be effective totally.

Guosen Securities' bond trades on Hong Kong Stock Exchange. Guosen in a communiqué to Hong Kong bourse said that "it was confident that it would be able to fully comply with its payment obligations in respect of the bonds."

Karen Khaw, a spokeswoman at Bank of New York Mellon, said "As trustee, BNY Mellon has received a clarification notice from Guosen which has been distributed to bondholders. That notice seeks to correct statements set out in earlier communications from Guosen."

Quoting news reports from Financial Times on the 31st of  March 2016, Reuters carried a story saying a unit of China's Guosen Securities has defaulted on a Hong Kong-traded Yuan bond. This default may be the first debt breach by a state-owned enterprise in offshore bond market in 20 years. Guoesen Securities said the Hong Kong unit was preparing a statement to give more details.

BNY Mellon had expressed its doubts in its previous notice, mentioning that Guosen Securities would meet Yuan 38 million ($5.9 million) coupon payment due on 24th of April on its Yuan 1.2 billion 'dim sum' bonds, which are renminbi debt sold outside mainland. Some credit market analysts in Hong Kong said that BNY Mellon's previous notice seemed to be technical pertaining to approvals required for Guosen's mainland unit on transferring funds to its Hong Kong unit.

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