The Domino Effect From This Chinese Bond Default

December 12, 2019 | Alternative Investments, News

Mutual funds bleed after Peking University Founder Group Co.’s bond default.

Peking University Founder Group Co.’s bonds crashed by 70% the day after the Group defaulted on a 2 billion yuan ($285 million) bond.

The Founder Group is a high tech Chinese industry and investment conglomerate with interests in everything from finance, real estate, healthcare, to commodity trading and IT services. It is 70% owned by the state-owned Peking University.

Meanwhile, the value of other Founder Group bonds also slumped as the fear spread.

Mutual funds hit badly

Holders of Founder Group bonds include the PICC Asset Management Co., which manages several bond mutual funds.

The asset manager said it would reduce the value of its funds based on their new prices, as declared by China Central Depository & Clearing Co. Ltd. (CCDC).

Moreover, three of PICC’s bond portfolios also were invested in another of Founder Group’s outstanding bonds. The net asset value of these funds, therefore, slumped by 5% to over 7% the day after the default.

From mutual funds, the contagion spread to other holders, such as brokerages. Shenwan Hongyuan Securities and China Galaxy Securities reportedly also have large holdings in Founder’s bonds. These entities are negotiating with investors regarding the losses from these bonds.

Founder Group: Surprising default

The default came out of the blue considering Founder reported net assets in excess of 60 billion yuan, as at end-September. That includes 45 billion yuan in cash.

It is also surprising that Beijing appears to be allowing the default, even though Founder Group has links to Peking University. The market has so far assumed an implicit guarantee by the Chinese Government for such companies.

If Beijing has decided to leave the company to its fate, Founder could be one of the biggest defaults ever in China. According to Bloomberg, It has 23 onshore notes outstanding, with two-thirds, or 24 billion yuan, due over the next year.

[Related Story: One of Asia’s oldest hedge funds warns of looming ‘distressed cycle.’ ]

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