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Gemdale saga raises questions over billions in yuan bonds

(ATF) After eight days of tangled trade-offs, a giddy bit to reduce the interest rate on a series of Gemdale bonds ended with a slap-up apology.

Last night, Gemdale announced that after careful consideration it chose not to adjust the coupon rate for its “18 Gemdale 03” and would maintain payment of the original 5.29% on these bonds.

Gemdale had been trying to lower the interest rate, but struck opposition from investors and the supervisory authorities.

In the near future, it is estimated that issuers might seek to adjust coupon payment rates on nine similar corporate bonds.

Based on the current reasonable bond issuance rate of 3%, Gemdale could have borrowed new and old loans to save more than 600 million yuan in capital costs.

‘Wishful thinking’

But under the wording in the original bond prospectus, it was “wishful thinking” for the 200-billion-yuan real estate company to think its tactic would work, Sina Finance reported.

Eight days ago, Gemdale, with a triple-A credit rating, unilaterally announced to investors that it intended to adjust the coupon rate for the third year of “18 Gemdale 03” bonds from 5.29% to 1.50%.

With the current generally low interest rates for bond issuance, Gemdale’s move seemed understandable. Its thinking was that based on the scale of the 1-billion- yuan worth of bonds, if investors accepted the new interest rate,

they could save 37.9 million yuan in interest in one year. If investors did not accept it, Gemdale planned to resell the bond through an older 5-year corporate bond, with an interest rate of only 3%, which was expected to save 22.9 million yuan in interest.

But while Gemdale had done good work with their calculator they had not counted on the tenacity of investors. Their corporate bond prospectus said in black and white: “At the end of the second year of the term, the company may choose to adjust the coupon rate. The coupon rate could be changed on the basis for the company’s improvement.”

Heated discussion

After much heated discussion regarding the expression “basis of improvement”, numerous high-level investors expressed their view that Gemdale’s unilateral sharp reduction in the interest rate clearly violated the spirit of the contract and harmed the interests of investors. It was deemed unacceptable.

As lead underwriter of bonds, the China International Capital Corporation put up a weak defence. Even after being interviewed by the Securities Department of the China Securities Regulatory Commission, it still insisted that “raising the basis point” could be understood as “raising the negative basis point” – that is, a reduction from 5.29% to 1.50% could be understood as “an increase of -3.79%.”

But the problem was very involved. In addition to the “18 Gemdale 03” bonds, Gemdale has nine other corporate bonds in the same issue.

Sham Shui-jun turned over the prospectus of 11 corporate bonds issued by Gemdale since 2015, and found that the situation was very unfavourable for Gemdale. After “17 Gemdale 01”, the prospectus issued by Gemdale bonds was slightly changed, and the wording “upward adjustment” was changed to “adjustment”.

Formal apology

Sina Finance reported that Gemdale said that details of every corporate bond due for resale in the future will be fully communicated to investors and regulators, before it is determined whether the interest rate will be adjusted.

As for the issue of 11 billion yuan in new bonds, they are up in the air, depending on a ruling by the Regulatory Commission.he company issued a formal apology to the Shanghai Stock Exchange. 

Chris Gill

With over 30 years reporting on China, Gill offers a daily digest of what is happening in the PRC.


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