A plan by Chinese property developer Gemdale to slash the coupon of one of its onshore bonds has raised objections from investors and caught the attention of regulators.
In an April 21 filing, the Shanghai-listed company said it planned to adjust the coupon of its Rmb1bn (US$141m) three-year non-put two notes issued in 2018 to 1.50% from 5.29% for the remaining year, effective on May 28. If bondholders do not accept the adjustment, they can exercise their put option to sell back the Shanghai exchange-listed bonds to the issuer.
The proposed coupon is lower than the one-year Shibor rate of 1.676% and China's one-year loan prime rate of 3.85% on April 22.
Gemdale said the move is consistent with the bond terms, which allow it to change the coupon at the end of second year.
Predictably, the proposal has sparked objections from investors, who accept that the terms allow the issuer to modify the coupon, but say that the adjustment should be based on the current coupon plus an extra return, not a downward revision.
The Shanghai Stock Exchange has written to Gemdale to ask for legal clarification on the issue. The bonds have also been suspended from trading since the afternoon of April 21.
Gemdale is an active issuer in China's exchange-traded and interbank bond markets. On April 3 it issued Rmb1.5bn 3.05% three-year bonds and Rmb500m five-year 3.55% bonds in the interbank market.
Gemdale also has outstanding US dollar bonds issued offshore through subsidiaries.
There are some precedents for cuts of onshore coupons recently, though not as steep.
On March 25 BBMG said it would lower the coupon of its Rmb3.5bn five-year non-put three bonds due May 2022 to 3.2% from 5.2%, effective from May 19. In response, bondholders accounting for 91% of the principal amount of the bond exercised their put option to sell back the paper to the issuer.
China Railway Group on March 10 said it planned to change the coupon of Rmb1.3bn three-year bonds due April 2022 to 2.7% from 3.4%, effective from April 15. The bond terms allow the issuer to adjust the coupon while investors have put options at the end of year one and year two. Not surprisingly, most of the bondholders, accounting for 89% of the principal amount, exercised their put option.