Asian Fixed Income

China-based diversified conglomerate PK Founder Group operates across IT, healthcare and pharmaceuticals, bulk commodities trading, education and training.

PK Founder Group did not have an external rating by international rating agencies, which is quite common among domestic companies in China. When the issuer first came to the international bond market in 2017 unrated, we assigned an ‘investment grade’ rating, with a view that there would be a high probability of support from the Government of China, despite the company’s relatively weak standalone financials. The bond issue was also attractively valued relative to other state-owned Chinese university issuers at the time.

After several interactions with the management, we concluded that the USD bond proceeds were being pledged against the company’s onshore borrowing facilities. This alarmed us as management was not transparent with regards to the structural subordination for offshore investors. The group quickly became a commercialised conglomerate, expanding into non-strategic mandates such as property. In our view, this  severely weakened the likelihood of future government support.

The group’s total debt surged by >USD20 billion by end-FY18, (+31% year-on-year increase), and five additional USD bonds (totalling US$1 billion) were issued during the first six months of 2019. Concern were raised after meeting with management, and analysing the latest financials. Positions in our credit portfolios were trimmed and subsequently sold completely. The internal credit rating was subsequently downgraded into the ‘high yield’ category. Following the disposal, the bonds depreciated sharply. In December 2019, the group missed a bond repayment. This ‘default’ resulted in a very sharp deterioration in the value of the bonds.