In the news: Huatong avoids bond default, too many bankers hurt HK IPOs and food scandals return

Huatong Road & Bridge avoids bond default

Huatong Road & Bridge Group, a Shanxi construction company, managed to make its US$64.5 million bond repayment at the last minute, avoiding a potentially unsettling default. The company raised enough funds to repay both the principal and interest of an Rmb400 million bond that was due by the end of the day. It is not clear where the company received the funds from but the near-default raises concerns that investors buying risky assets can expect the government to bail them out.

Source:
The Wall Street Journal

Analysts voiced their concerns over the fact that investors avoiding a financial hit could encourage more reckless investing and lending, which in turn could damage China's financial system. The government will need to address the misalignment of financial and moral hazard, though regulators and the central bank have been experimenting with allowing some debt defaults, such as the first-ever corporate onshore bond default by Chaori Solar, hoping to introduce some discipline into the market. Regulators have also stepped up credit risk monitoring as many corporate and government borrowers struggle to pay debt as the economy's growth rate slows. However, some say that Huatong's bond troubles stem from company-specific problems and isn't representative of bigger issues involving the Chinese bond market. Even so, investors will need to be cautious.

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Too many bankers hurt HK IPOs

In the past two years, Chinese companies have hired dozens of banks to sell their IPOs, hoping for higher valuations. This trend backfired, however, as these IPOs tended to underperform those using fewer bankers or bookrunners. Pork company WH Group, whose IPO in April failed after it enlisted a record 28 banks, is trying again using only two main advisers this time to raise US$2.1 billion. Luye Pharma Group similarly hired three banks in its US$798 million Hong Kong IPO in July. Reverting to fewer deal advisers means higher profits for banks, which have seen IPO revenues fall from sharing fees with more competitors.

Source:
Bloomberg

Having too many banks makes it harder to coordinate, which can lead to conflicting messages being sent out to investors in roadshows, said Luye chairman Liu Dianbo earlier this month. A review of 25 offerings over the past three years showed that the post-IPO performances of companies that used the most advisers tend to fall behind other deals, with the 12 companies that used an above-average number of banks underperforming since they started trading. As Hong Kong's IPO market slumped in 2012, Chinese companies pushed into the market and were willing to accept lower fees and more junior roles on offerings, leading to a drop in IPO arranging profitability. How this trend plays out will be important for the many IPOs to come in the next few years.

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China's food safety scandal escalates

KFC's parent Yum Brands and McDonald's apologised to Chinese customers this week after it was revealed that Shanghai Husi Food, a unit of US company OSI Group, had supplied expired meat and meat picked up from the floor to the two chains. Shanghai Husi Food was shut down by local regulators and restaurants that also stopped obtaining supplies from the company include Burger King, Starbucks and Papa John's. As of Wednesday, Shanghai regulators said they had conducted 875 inspection visits to 581 companies that use products from Shanghai Husi.

Sources:
Reuters
The New York Times

Food safety has been one of the top concerns of Chinese consumers, especially after the infant formula scandal in 2008 where six infants died from the presence of the industrial chemical melamine in dairy products. Chinese customers have been looking to foreign brands as offering higher safety standards. Companies have gone with the trend as Danone upped its stake in Mengniu earlier this year, Arla, which already owns a Mengniu stake, is helping to professionalise its research and Nestlé is getting hands-on in improving quality control in China. The hope for Chinese consumers is for the domestic industry to clean itself up, as importers cannot keep up with demand and Hong Kong placed a ban on leaving the city with more than two cans of milk powder.

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