(Bloomberg) -- A port operator in northeastern China once at the center of U.N. sanctions on North Korea is finding itself in another storm.
Dandong Port Group Co. has regained attention after a controversial court ruling in favor of a state-led debt overhaul that forces steep losses on creditors and drew shareholders’ complaints about an opaque bankruptcy process. The court verdict also runs counter to an unprecedented roadmap that Beijing has just laid out to restore investor confidence via fair handling of bond defaults.
The Dandong authorities’ iron-fist approach is a reminder that despite Beijing’s repeated pledge to treat all investors equally, a powerful state sector and deeply rooted local protectionism are just among the many hurdles it faces in an uphill battle.
Dandong Port, located on the border with North Korea, began defaulting on local bonds in 2017 as a result of years of debt-fueled expansion and a regional economy battered by international sanctions on Pyongyang.
The firm has failed to repay investors on nearly 8 billion yuan ($1.2 billion) of local notes and ranks as China’s eighth largest bond defaulter, according to data compiled by Bloomberg.
The port operator went into bankruptcy proceedings in April after the Dandong Intermediate People’s Court appointed a group of local government officials as administrators. The case also involves three companies related to Dandong Port.
Under the restructuring plan, local authorities will reorganize the four companies into two new entities, including one with the most lucrative port assets to be controlled by a major state-run port operator from the province, according to a court ruling on the National Enterprise Bankruptcy Information Disclosure Platform’s website. The other entity gets the less profitable businesses and will be collectively owned by creditors.
Institutional bondholders will each receive a maximum of 300,000 yuan in cash compensation and can swap their remaining debt claims for shares in the weaker of the two new firms, according to the plan.
Despite fierce opposition from creditors and shareholders who had voted against the plan twice, the local court handed down its irrevocable ruling Dec. 31, calling the compensation “relatively fair”.
Many bondholders of Dandong Port said the restructuring plan is significantly worse than those in other cases in China, where investors enjoyed much higher debt recovery.
“The court’s forceful ruling, which disregards ordinary creditors’ interests and may benefit certain parties in the short term, will seriously damage the business reputation of the Dandong area,” said Deng Hao, chief executive of Beijing GEC Asset Management.
Forceful rulings are a special right awarded to the court and need to be used “very prudently,” Deng said.
According to Harold Ruvoldt, a lawyer, who said he represents 80% of the company’s shareholders, the way local authorities handled the firm’s restructuring drew opposition from shareholders, including the family of Wang Wenliang, a construction magnate who took control of the port in 2005.
Wang resigned as Dandong Port’s legal representative in 2017, after the 66-year-old former official was expelled from China’s legislative body after being implicated in a vote-buying scandal, according to Dandong Port’s disclosure in 2016 on the Shanghai Stock Exchange.
Wang’s family maintains a 53.3% stake in the port operator via two offshore entities, according to Ruvoldt, who also said that he is “deeply disappointed” at the court’s verdict, adding that adopting a twice-rejected plan was a “grave error”.
Ruvoldt added that the shareholders he represents submitted an alternative restructuring plan that seeks to raise $2.5 billion to repay debt and put the firm back on sound footing.
In the restructuring proposal shared by Ruvoldt and reviewed by Bloomberg, the shareholders said the administrators never disclosed any financial information about the debtor to them or informed them about the progress on restructuring. “The shareholders were completely shut out of the bankruptcy and reorganization process,” according to the document.
Speaking on condition of anonymity because they’re not allowed to speak publicly, some bondholders said that they have failed to meet or have effective communications with the administrators. They’re also unable to contact Wang Wenliang, they said.
The dissenting shareholders also complained in their alternative restructuring proposal about the fact that Liaoning Port Group, one of the province’s leading state-run firms, was the sole candidate for the role of strategic investors in Dandong Port’s restructuring.
The practice raised questions about local protectionism and the outsized influence of a state sector that has dominated the rust-belt region for years, analysts said.
Calls to Dandong Port and the bankruptcy administrators’ office went unanswered. The Dandong Intermediate People’s Court has yet to respond to written queries from Bloomberg. Ruvoldt declined to give contact information for the Wang family to seek comment on their take on the restructuring.
Lack Of Transparency
Disclosure and transparency is at the heart of criticisms about Dandong Port’s bankruptcy and restructuring process, said Zhang Wenliang, a Beijing-based partner at Merits & Tree Law Office.
“We have talked to many foreign investors about default opportunities in China and their common concern is that despite improved laws in China, there are lots of uncertainties regarding implementation,” Zhang said.
In addition, the government-led restructuring plan, which prioritizes compensating employees’ claims over creditors, also highlights the political pressure on local authorities to preserve social stability, analysts said.
The Dandong court’s decision looks even more glaring as it came just four days after top Chinese regulators released draft rules aimed at using a more transparent and market-oriented approach to tackle bond defaults.
China’s central bank, National Development and Reform Commission and China Securities Regulatory Commission didn’t immediately reply to a fax seeking comment on Dandong Port’s restructuring plan.
“Chinese regulators are striving for better protection of investors but it’s a tough task and there’s a long way to go,” said Wu Rui, executive director for mezzanine and credit investment at CDH Investments.
There’s been a gradual rise in the number of bond issuers entering bankruptcy proceedings since China’s first onshore bond default in 2014, from just one that year to 20 last year, according to Everbright Securities. Of the 39 companies that entered bankruptcy proceedings, only 9 have completed the process, the brokerage wrote in a note published Monday.
(Updates with number of bond issuers entering bankruptcy proceedings in last paragraph)
--With assistance from Yuling Yang, Molly Dai and Lucille Liu.
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