Private enterprises capital chain is tight: Dongfang Hongzi management steps on Lei Youfas bankruptcy

 Private enterprises capital chain is tight: Dongfang Hongzi management steps on Lei Youfas bankruptcy

On October 11, the reporter of the China Times called the Oriental Red Capital Manager many times and sent an interview letter according to his request. As of the time of submission, no reply was received.

Tens of millions of bonds are insolvent

According to the companys official website, Oriental Red Capital Management was established on July 28, 2010, and it is the first asset management company in the securities industry approved by the China Securities Regulatory Commission. The companys main business scope includes securities asset management business and public offering securities investment fund management business. By the end of 2018, the entrusted assets management scale of Dongfang Hongzi management has exceeded RMB 200 billion, of which the active management scale accounts for 98.50%. In 2018, the companys entrusted assets management business ranked first in the net income industry.

A bond of 15 million yuan could not be repaid, and the industry leader Dongfang Red Capital Management and CITIC Securities were involved in the lawsuit.

According to the court of first instance, on December 26, 2012, Zhifu leather industry issued the Solicitation Instructions to issue three-year SMEs private equity bonds with a quota not exceeding 150 million yuan. The underwriter is CITIC Securities. Zhou Mou, as the legal representative and chairman of Zhifu leather industry, and Zhonghai Xinda Guarantee Co., Ltd. (hereinafter referred to as Zhonghai Xinda) respectively provide joint and several liability guarantee. Shenzhen Stock Exchange agreed to record the private bond issue by Fupi on July 27.

On January 31, 2013, Dongfang Red Capital Management signed a subscription agreement with Zhifu Leather Industry, and Dongfang Red Capital Management subscribed 15 million yuan for 12 to become rich debt. The subscription agreement stipulates that: the first day of the issuance of the bonds is February 4, 2013, with a bond term of 36 months, attached with the issuers option to increase the coupon rate and the investors option to sell back at the end of the 24th month; the annual coupon rate of the issuance of the bonds is 9.5%, and the single interest shall be paid half a year, without compound interest, and the interest shall continue to be calculated after the overdue payment of liquidated damages; the bonds are on February 5 and August 5 of each year. On the coupon payment date, the rich leather industry shall pay the interest of the previous interest period according to the agreed interest rate.

Until August 5, 2014, fortune leather was able to pay bond interest. On December 8, 2014, Zhifupi issued a prompt announcement that by the end of the second year of the current bond life (Note: February 2015), the issuer chose to raise the coupon interest rate to 11%, and the investor had the right to register during the registration period of the investors repurchase, sell back the bonds held to the issuer, or choose to continue holding the current bonds. The date of return of funds is February 5, 2015.

Thereafter, Zhifu leather industry issued the Second Promotional Notice and the Third Promotional Notice on December 30, 2014 and January 8, 2015 respectively, which confirmed the aforementioned matters again.

Based on this, the Oriental Red Capital Management Company has registered the repurchase of 15 million yuan of bonds subscribed. Other bondholders have made the same choice. On February 3, 2015, Zhifu Leather issued a Return Bulletin saying that according to statistics, all bonds issued in this issue have been declared for resale, the remaining custody is 0, and the amount of resale is 157.125 million yuan (including interest).

Resale Bulletin also said that the rich leather industry appeared cash flow shortage and other difficulties, unable to pay the 12 to become rich debt resale principal and interest. Rich leather industry will strive to raise funds to repay the principal and interest. The principal and interest payments of current bonds will be paid to bondholders by off-the-counter payment after the implementation of funds and the designation of debt repayment schemes.

Dongfanghong asset management and other six parties as the applicant, and the rich leather industry as the respondent, apply for arbitration together. On July 18, 2015, the Trade Commission issued an award confirming the principal amount of Oriental Red Capital Management Bonds, and awarded that Zhifu leather industry pays principal, interest, liquidated damages and arbitration fees.

In addition, CITIC Securities also led Fupi to apply for arbitration for the respondent, and the Trade Commission made a corresponding award. In addition to the Oriental Red Capital Management, the other five investors and CITIC Securities, respectively, took CITIC Xinda and Zhou Mou as defendants, and separately filed a guarantee contract suit with the First Instance Court and the Third Intermediate Peoples Court of Beijing.

Bankruptcy of Debt Issuing Company

The defendant, Zhonghai Xinda, responded that he disagreed with the claim of Oriental Red Capital Management. According to CITIC, the legal nature of the Subscription Agreement is a loan contract. The contract stipulates that the repayment of principal and interest at a fixed interest rate after the expiration of the contract is essentially a loan made by Zhifu Leather Industry to Oriental Red Capital Management. The Oriental Red Capital Management, as a non-bank financial institution without the qualification to lend, provides funds to the non-financial enterprises to enrich the leather industry, which is in violation of the mandatory provisions of the state financial control. The Court of First Instance approved the legality of the Subscription Agreement and did not adopt the statement of CITIC.

In 2015, Stock Market Weekly published relevant reports, questioning CITIC Securities in the 12 to become rich debt related business suspected of irregularities. The report quotes bondholders as saying that the issuer of the bond, Rich Leather Industry and the guarantor, Hitachi Hitachi, are not only unable to pay interest, but may also be unable to bear the principal. CITIC has been involved in private debt default disputes for many times before, and is also unable to advance payment, and has been listed in the list of national discredited executing agencies.

The report also disclosed that CITIC Securities had bought 40 million yuan of inferior grade bonds while underwriting the 12-to-be-rich bonds. This is considered by the industry to be a credit enhancement with its own funds.

In August 2017, the Chaoyang District Peoples Court of Beijing issued a first instance judgment, in which the defendant Zhonghai Xinda and the defendant Zhou Mou, within ten days from the effective date of the judgment, were held liable for paying off the bond principal of 15 million yuan, relevant interest, liquidated damages, etc. which should be paid by the rich leather industry to the plaintiff Dongfang Hongzi management.

The reporter of China Times searched relevant judgments and found that as early as December 2017, the rich leather industry had been adjudicated bankrupt by the peoples Court of Suyu District, Suqian City, Jiangsu Province, and entered the liquidation stage.

In April 2017, a judgment showed that Dongfang Hongziguan had purchased private equity bonds issued by Tianjin Taiheng Gas Co., Ltd. (hereinafter referred to as Taiheng Gas Company) for 6 million yuan. Later Taiheng Gas Company issued a notice saying that because of the deterioration of the companys operating conditions, bonds constituted a default. The guarantor of Oriental Red Capital Management v. Bond shall assume joint and several liability for liquidation and win the lawsuit. However, the subsequent execution ruling shows that the guarantor does not have the ability to execute.