Sunday, August 28, 2005

Failure to Disclose - China, Inc.

What happens when one of the fastest growing economies in the world decides to default on its bond obligations, and then later settles w/some of its creditors, but ignores the others?

Apparently your credit score goes up, you don't need to disclose this information to the credit market in future offerings, and the major credit rating agencies don't mention the prior default in any of their literature... At least, that's what happens if you're China, Inc.

According to Sovereign Advisers and the American Bondholders Foundation (pdf file), China defaulted on bond payments for its 5% Reorganization Gold Loan (due in 1960). American citizens holding these notes (now represented solely by ABF) have yet to be paid. Making the credit picture a little worse, China not only defaulted, but has previously settled with selected creditors (though they were pari-passu w/American holders) in Great Britain. Now French holders may reach a settlement as well. But American creditors are ignored. And worse, the ABF argues, is that American credit rating agencies ignore this behavior, refuse to include it in credit analysis of China, and global banking underwriters fail to disclose this in the disclosure forms for new issues.

I can't help but wonder, are there are some enterprising young lawyers out there willing to take on the major NRSROs? And perhaps more importantly, what about the underwriters for new issues who fail to disclose the prior defaults? Those are some very deep pockets.

Apparently there is an investigation, and some people in Congress find the whole deal appalling, but for now, China (and Chinese Co.'s doing international business), get good credit for free. You can almost hear the Chinese central bankers sing: "Don't Cry for Me Argentina."