China makes debt rating agency pay for default, in a precedent for legal and financial service firms to be responsible for their work
- Dagong Global Credit Rating must repay up to 10 per cent of at least 494 million yuan of combined debt claims to more than 400 individual bondholders of Wuyang Construction Group, which defaulted on 1.4 billion yuan of bonds three years ago
- Wuyang Construction’s legal representative and actual controller Chen Zhizhang, underwriter Tebon Securities, as well as an accounting company and a legal firm are also collectively responsible, the court said
A Chinese court ruled that a local ratings firm should help compensate some creditors for a construction firm’s 1.4 billion yuan (US$216 million) bond defaults three years ago, a first in the country as Beijing raises pressure on agencies to improve their due diligence.
Dagong Global Credit Rating is responsible for repaying up to 10 per cent of at least 494 million yuan of combined debt claims to more than 400 individual bondholders of Wuyang Construction Group, according to a ruling by Hangzhou Intermediate People’s Court dated Thursday and seen by Bloomberg News.
Wuyang Construction’s legal representative and actual controller Chen Zhizhang, underwriter Tebon Securities, as well as an accounting company and a legal firm are also collectively responsible, the court said, citing their failures to conduct due diligence properly.
Beijing has tightened oversight of the country’s bond market following a surge of defaults since November, imposing short-term bans on new business on two other rating agencies and launching probes into several banks, accounting firms and a large brokerage for alleged irregularities related to bond sales.
The Hangzhou court’s ruling also sets the precedent for bond underwriters, accounting and law firms to be financially responsible for bondholders’ losses, potentially offering a new road map for handling such cases in the future.
“This verdict should be the first of its kind in China. It substantially raises the cost of fraudulence and inadequate due diligence in the bond market,” said Yang Hao, a fixed income analyst at Nanjing Securities Co. “Financial intermediaries will become more prudent in the future and investors may also actively explore this approach to seeking compensation.”
Wuyang Construction defaulted on two onshore bonds totalling nearly 1.4 billion yuan in 2017 and was later alleged by China’s securities regulator of falsifying financial documents to win regulatory approval to sell bonds.
