Greentown Bond Buyback Signals China Rule Change

struggling Chinese property company will buy back nearly all of its $400 million of foreign bonds after a capital-raising that included investment by a Chinese bank, a sign that funding from domestic lenders may allow Chinese firms to pay off foreign debt holders. As a result of support from investors, Greentown China Holdings Ltd. avoided a default, which it risked as its capital position weakened, and the company crept dangerously close to breaching its bond terms, or covenants. Investors holding 89.72% of Greentown bonds have tendered their bonds at 85 cents on the dollar. An additional 2.16% of the bonds are expected to be sold, based on consent notices the company has received. The offer represents a 25% premium over where bonds were trading late last month. To fund the buyback, Greentown raised 1.98 billion Chinese yuan ($290.2 million) in April through a trust, which in turn sold notes to Industrial & Commercial Bank of China Ltd., the country's largest bank by market capitalization, as well as to undisclosed investors in China, according to a company filing. In its filing with the Hong Kong Stock Exchange, where its shares are listed, Greentown listed the trust as one of several sources of financing for the buyback. The company also shed some assets in order to raise the necessary funding. ICBC officials weren't available for comment. Greentown appears to be using a government-encouraged lending spree by Chinese banks to pay off Western investors. In the past, Chinese companies have been restricted from using domestic loans to redeem foreign bondholders. But investors say the restrictions appear to be relaxing as Chinese policymakers urge banks to lend to spur economic growth. While investors supported Greentown's offer, made in April, they haven't welcomed all such offers. Earlier this year, Asia Aluminum Holdings Ltd. offered to buy back bonds at 27.5 cents on the dollar and so-called payment-in-kind notes, which are essentially riskier but higher-yielding debt, at just 13.5 cents. The deal failed, and the court in March appointed provisional liquidators to determine the company's next step. Greentown said the buyback was essential to shoring up the company's finances. Greentown develops luxury residential properties in China. An analyst at Moody's Investors Service in Hong Kong warned that Greentown's position remains tenuous. In a report this week, Kaven Tsang said trust financing is expensive and increases the interest burden on the company. Trust notes generally pay interest rates in the mid-teens in China, bankers and analysts say. The original bonds, issued in November 2006 and maturing in 2013, carried a 9% coupon. In addition, the company still has convertible bonds due in May 2010. Replacing its foreign bonds with domestic debt could still leave the company scrambling to come up with capital next year, Mr. Tsang said, calling this week's buyback a ''heads I lose, tails I lose' predicament.' Laura Santini