Nine Dragons Shares Hit as S&P Pulls Rating

JUNE 15, 2011   the wall street journal

By FIONA LAW And JOANNE CHIU

Shares in Chinese packaging manufacturer Nine Dragons Paper have plunged after S&P withdrew its credit rating, while efforts to privatize the banking industry in South Korea have hit another roadblock. The WSJ's Isabella Steger and Peter Stein discuss.

HONG KONG—Shares of a Hong Kong-listed packaging manufacturer controlled by one of China's richest entrepreneurs plunged after Standard & Poor's made the unusual decision to withdraw its long-term corporate credit rating for the company's debt, citing "insufficient access" to management.

S&P's decision, which pushed shares of Nine Dragons Paper (Holdings) Ltd. 17.4% lower before trading was halted midafternoon, came amid heightened concerns over transparency and governance issues at some overseas-listed Chinese firms

In a statement, S&P referred to the company's "aggressive debt-funded growth appetite." Without sufficient access to management, the ratings firm "cannot fully understand the company's strategy and financial management or assess its future credit risks," it added.

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Nine Dragons Deputy General Manager Benjamin Ng disputed S&P's comments, and said the company was given no prior notice before the withdrawal. He added the Chinese company, which has production facilities in the cities of Dongguan, Tianjin and Chongqing, has a sound financial position, asserting that the S&P decision won't have any impact on its relationship with banks and its refinancing capabilities.

Nine Dragon has only one corporate bond maturing, in April 2013, with just US$50 million outstanding after the company bought back most of the issue, Mr. Ng noted.

"They could at least have sent us questions via email," he said, adding many of the company's staff travel frequently and aren't always at their offices.

Nine Dragons is controlled by Zhang Yin, China's richest woman and the nation's third-wealthiest person with assets worth US$5.6 billion in 2010, according to HuRun Report, a Shanghai-based publication that compiles wealth rankings. Ms. Zhang, also known as Cheung Yan in Hong Kong, control a stake of around 67% in the Chinese packaging-products company, which as of Tuesday had a market capitalization of about $3.4 billion. Ms. Zhang couldn't be reached for comment Tuesday.

ZUMApress.com

Nine Dragons Paper Chairwoman Cheung Yan (Zhang Yin)

The U.S. Securities and Exchange Commission recently said it is investigating accounting and disclosure issues at a number of Chinese companies listed on U.S. exchanges. Trading has been halted in more than a dozen U.S.-listed stocks of Chinese companies. Nine Dragons isn't listed in the U.S.

Hong Kong's Securities and Futures Commission late Tuesday said it declined to comment on individual cases.

The S&P ratings withdrawal "does come at a time when investors are worried about corporate governance, and it could make investors worry still more about this issue," said Guy Stear, head of research for Asia at Société Générale Corporate & Investment Banking.

Fund managers believe that yields on corporate bonds from Chinese industrial firms will continue to rise in coming weeks as investors demand higher returns to account for the risks linked to the concerns over transparency. Yields already have been rising on a mix of concerns about accounting and governance as well as Chinese growth and Europe's debt problems. Nine Dragon's bond price didn't move on Tuesday.

Earlier this month, shares of Sino-Forest Corp., a Hong Kong-based tree-plantation company listed in Toronto, plummeted after a short seller published research alleging problems with the company's accounts. The company has called the research "inaccurate" and says it is investigating the allegations.

S&P, which had a double-B, or speculative-grade, corporate rating on Nine Dragons, also withdrew its weaker double-B-minus issue rating on Nine Dragons' outstanding senior unsecured notes.

Some analysts questioned the S&P decision. "Nine Dragons is nowhere near a distressed level," said Charlene Gu, an analyst at Yuanta Securities, who called the stock drop an overreaction.

Fitch Ratings, which rates Nine Dragons double-B-minus, hasn't encountered any problems in getting access to company management, said Su Aik Lim, the firm's director of Asia Pacific Corporates.

Nonetheless, Nine Dragons remains highly geared, due in part to its large investment plans. The company's gearing ratio, a key measure of a company's debts, stood at nearly 90% at the end of December 2010.

According to an earlier report from Citigroup, the containerboard maker has doubled its capital expenditure to 9.2 billion yuan ($1.42 billion) for the fiscal year ending June 30 to help fund the construction of new plants and the acquisition of a paper mill in Hebei province, which surrounds Beijing.

"S&P's withdrawal could increase the difficulty for Nine Dragons to refinance its debts, consequently leading to higher borrowing costs," said William Lo, an analyst at brokerage Ample Capital Ltd.

For its part, S&P says it doesn't make ratings withdrawal decisions lightly, though it cited several examples of such decisions made on companies in the region over the past year.

"In serving investors, our policy is to withdraw ratings at our discretion and to provide transparency by updating the market about our views at the time of any withdrawal," the ratings firm said. It noted that Nine Dragons had been paying for S&P's ratings services.

—Chester Yung and Isabella Steger contributed to this article.