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Huishan saga exposes China’s tycoon finance risk

Huishan saga exposes China’s tycoon finance risk

By: Jennifer Hughes in Hong Kong

More price falls possible with $859bn of mainland shares pledged as collateral

The disclosure that China Huishan Dairy’s founder pledged 71 per cent of his company’s shares for loans before the group’s stock collapsed has raised fears that more companies could be at risk if other large shareholders have followed his example.

Share-backed lending is common in Asia and a sought-after business in Hong Kong for banks keen to build deeper links with favoured tycoons, whose wealth is often tied up in their company’s stock. Private equity funds also regularly borrow against the value of their holdings in listed groups.

While the loans carry strict triggers and borrowers forfeit shares if they cannot meet margin calls promptly, the extreme nature of Huishan’s crash — the shares plummeted 85 per cent in 45 minutes before dealing was halted and are still not trading — means it is unclear whether Yang Kai might be forced to cede control of the group.

“A lot of Chinese banks do these deals without margin calls and just have a hard trigger when the share price hits 50 to 60 per cent down. Then the client has to pay up,” said one Hong Kong-based banker who arranges share-backed deals. “A lot of banks here are saying hopefully Chinese banks have learned their lesson [from Huishan].”

The different lending standards between international banks and those in China — where regulators are considering curbs on the practice — have led bankers to warn that other companies could be as exposed as Huishan since Hong Kong does not require shareholders to disclose pledges if the loans are for personal use.

Huishan Dairy reported the full extent of Mr Yang’s pledges on Tuesday, four days after its shares collapsed. Previously, Mr Yang had disclosed in December that he had pledged 26 per cent of the company’s equity for a HK$2.14bn ($275m) loan from China’s Ping An Bank in June 2015.

Banks typically advance between 30 and 40 per cent of the value of the shares pledged. International bank deals tend to carry a margin call if the shares fall somewhere between 10 and 40 per cent in value. They also require disclosure of other outstanding loans and a promise not to re-pledge the same shares. Any calls must either be met in cash or, in some cases, by adding shares to the collateral pool.

Banks sell shares promptly if calls are not met, occasionally triggering sharp share price falls in the process. Huishan Dairy said Mr Yang was checking with his lenders to confirm whether they had sold any shares.

The use of shares for collateral has been growing on the mainland too, with Rmb5.9tn ($859bn) worth of stock pledged as of last week, according to Bank of America Merrill Lynch.

Regulators, alarmed by the rapid spread of the practice, are considering imposing curbs that would limit the amount of shares pledged to 50 per cent of a company’s equity and prevent a single lender from taking on more than 30 per cent.

Mr Yang’s pledges backed a series of loans to himself, his main vehicle Champ Harvest and his other businesses — a range of uses bankers said was not unusual. Share-backed loans are often also used to buy more shares in the same company or even fund loans to that company.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.

https://www.ft.com/content/703db886-1529-11e7-b0c1-37e417ee6c76

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