China Tells Internet Firm Ex-Boss Come Home to Fix Debt
byBloomberg News
March 20, 2015
(Bloomberg) — China told an Internet company to urge its former chief, under investigation for alleged securities rules violations, back to the country as it seeks to avert a second corporate default in the onshore bond market.China Securities Regulatory Commission said Cloud Live Technology Group Co. should tell its biggest shareholder, which filings show is former chairman Meng Kai, “to fulfill his promise and solve the repayment problem” on notes it must repurchase next month, according to a March 18 company statement. Cloud Live said March 4 investors had applied to sell back 398.71 million yuan ($64 million) of bonds on April 5 and that there were “big uncertainties” over the repayments.
President Xi Jinping’s anti-graft probe and the slowest economic growth since 1990 are stoking concern defaults may spread, a year after Chaori Solar Energy Science & Technology Co. became the first and sole company to default on onshore bonds. Cloud Live’s Meng resigned as chairman Jan. 5, days after the securities watchdog began investigating him.
“Investors will always be vulnerable if they invest into a company with weak corporate governance and the founder controls every aspect of the company’s operation and decision-making,” Violet Ho, senior managing director in Hong Kong for Kroll Inc., a New York-based risk consultancy, said about the risk of investing in China. “If the founder is implicated in a scandal or has a controversial reputation, the negative impact to the company, as well as its investors, will be much greater.”
Restaurants to High-Tech
A person who answered the phone Friday at Cloud Live — whose businesses include cloud computing, big data and web-based new media — said the company is preparing its annual report and can’t take questions. The official, who is in the company’s investor relations department, wouldn’t give his name. CSRC didn’t immediately reply to e-mailed questions.
This isn’t the first time Xi’s efforts to clean up the world’s second-biggest economy have touched the company. Cloud Live was formerly Beijing Xiangeqing Co., which operated a chain of restaurants. It said in July it was shifting into the Internet business and changed its name in August.
The company’s abrupt turn into the “totally unrelated” information-technology industry came after it shuttered some stores in 2013, according to a documentary on Xi’s anti-graft drive that aired on the official China Central Television on Dec. 17.
Anti-Graft Barometer
The business performance of “high-end restaurants like Xiangeqing has become the barometer” for the anti-corruption drive which has discouraged wining and dining, the documentary said. Many of its restaurants in Beijing were located near government agencies or military compounds.
The CSRC told Cloud Live on Dec. 26 it would start investigating its then-chairman Meng for violating securities regulations, according to a Dec. 29 company statement that didn’t give further details. Cloud Live said in a Jan. 7 statement that Meng had resigned as chairman and president on Jan. 5, in order to protect company and investor interests.
Cloud Live was told by the CSRC in October that the company itself would be investigated for violation of securities rules. The probe hasn’t produced any results, according to a Feb. 27 statement.
The firm is among 18 companies the CSRC is investigating, along with their staff, for alleged stock-market manipulation, the regulator said in a Dec. 19 statement. The probe is looking into practices including driving up stock prices by quickly buying and selling and selectively releasing information to move the market, it said.
Gone Abroad
The case highlights the government’s efforts to punish financial wrongdoing. Premier Li Keqiang told the State Council last March that China needs to take a tough stance on misconduct such as market manipulation and insider trading to protect investors, according to a report at the time in the official Xinhua News Agency.
China launched a campaign dubbed Operation Fox Hunt in July to repatriate money that’s been wrongly stashed overseas. It has pressed countries including the U.S. and Canada to turn over suspects even in the absence of extradition treaties.
Cloud Live’s Meng went abroad after the nation’s Golden Week holiday in the first week of October to raise money for note repayment and look for potential buyers for company assets, according to a Dec. 2 company filing. It didn’t say where he had gone, and there has been no update on his whereabouts.
Cloud Live issued the bonds in question in 2012 with a 6.78 percent coupon. The yield on the securities has jumped to 18.5 percent from 9.7 percent on Dec. 31, exchange data show. Investors have an option to sell them back to the company on April 5.
The 398.71 million yuan that noteholders have filed to offload compares with only 10.39 million yuan in a special account for the repayment, according to company statements. Cloud Live sold 30 million shares at a price of 8.19 yuan per share on March 16, according to a separate statement Wednesday. It will transfer 126 million yuan to its special debt repayment account, after spending the remaining proceeds from the share sale to repay other borrowings, it said.
“The regulator is trying to fulfill its responsibility before the company’s debt repayment is due,” said Sun Binbin, a bond analyst at China Merchants Securities Co.
To contact Bloomberg News staff for this story: Judy Chen in Shanghai atxchen45@bloomberg.net; Lianting Tu in Hong Kong at ltu4@bloomberg.net
AsianExtractor: Unearthing Accounting Fraud in Asia 