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Much business in Asia is still done the old way — trust is the most important asset. As the region becomes the biggest source of dollar bonds in the developing world, however, investors are starting to question whether they need more in writing. It’s high time.
For one thing, bond fund managers are talking about limiting the freedom of borrowers to do as they please with the cash they raise. Issuers in the region have been particularly vague — almost half of the dollar debentures sold by nonfinancial companies were for “general corporate purposes”. That’s the highest proportion in the world, and compares with 17.5 percent in Latin America.
As a result, investors often watch with tied hands as companies use the cash for activities that don’t generate cash flow. Creditors are especially unnerved when borrowers buy back shares or pay dividends. It’s happening more and more in Asia.
The latest case was Hong Kong’s Television Broadcasts Ltd., or TVB, which raised $500 million in late September. On Tuesday, the company said it was spending HK$4.2 billion ($543 million), an amount conspicuously similar to what it borrowed, to buy back 31.5 percent of its shares outstanding. The HK$30.5 per share it’s paying was 14.7 percent above Tuesday’s closing price, and will increase the position of the controlling shareholder to 43.7 percent from 29.9 percent. The buyback is happening even as the company said its profit is dropping by more than 50 percent because of weak advertising.
After the announcement, the bonds fell the most on record, while the shares soared as much as 12.8 percent. TVB said in its buyback announcement that it would use existing cash resources. There’s no detailed explanation of its source. One thing is clear — the company would have had to save almost every penny of cash it generated from operations since June 30, 2013, to amass enough for the buyback.
The case has already generated a lot of chatter among bond investors in Asia. Rather than treating the issue as a portfolio hiccup, they should take the opportunity to start changing the culture of trusting issuers and giving them blank checks.
— Bloomberg
Christopher Langner is a markets columnist for Bloomberg Gadfly.