Muddy Waters Stigma Means $1 Billion Cost To Exit U.S.

The nation’s biggest policy lender has offered funding so Fushi Copperweld Inc. (FSIN), a Beijing-based wire maker listed on the Nasdaq Stock Market, can buy back its shares from the public, the company said last month. China TransInfo Technology Corp. (CTFO) said June 8 it would drop its U.S. listing with CDB financing. The bank has provided more funding than any other lender to help the nation’s companies exit the world’s biggest equity market, according to Roth Capital Partners, which specializes in emerging markets.

While more than 60 Chinese companies joined U.S. exchanges in the three years through 2011, only one listed this year after those with market capitalizations of less than $500 million lost 53 percent of their market value. The crash began in June 2011, when Muddy Waters LLC, a short-selling firm, raised concerns about accounting and corporate-governance standards at Chinese companies by accusing Sino-Forest Corp., a timber company that traded on the Toronto exchange, of exaggerating its assets.

“There’s this sort of stigma on Chinese listed companies,” said Phil Groves, president of Hong Kong-based DAC Financial Management China Ltd., which assists investors with due diligence of China investments. “These Chinese companies if they’re not really big they are essentially marooned on the U.S. listing system, where the promised land of lots of further share issuances and debt financings aren’t happening.”

National Interests

CDB, established in 1994 and based in Beijing, is providing financing through dollar loans as stock market losses in the U.S. prompt smaller companies to consider moving their listings toHong Kong and other exchanges.

With foreign currency loans of $187.3 billion at the end of 2011, the bank backs Chinese companies by helping them obtain business across the globe. Shareholders of the lender, which isn’t listed on any stock market, include the Ministry of Finance, the National Council for Social Security Fund and state-owned Central Huijin Investment Co.

“CDB has an incentive to help the Chinese players, particularly the large players, to regain their foothold,” in part because many of them are existing customers, said Peter Huang, a Beijing-based lawyer at Skadden, Arps, Slate, Meagher & Flom LLP. “The other Chinese commercial banks have not expressed a keen interest in making available facilities in this regard.”

’Red Flags’

Sino-Forest, the tree grower accused of fraud by Muddy Waters, filed for bankruptcy in March after denying the allegations.

Groups that bet on stock declines including Ripley Capital and Jonestown Research have questioned other Chinese businesses. Moody’s Investors Service said last July that 61 Chinese companies it examined raised “red flags” due to possible accounting risks.

The 53 percent plunge in the share prices of such firms since the Muddy Waters’ report on Sino-Forest in June last year is more than five times the 9.5 percent fall in the same period fortop Chinese companies traded in the U.S. The biggest businesses include PetroChina Co., whose $254 billion market capitalization exceeds the $206 billion of Warren Buffett’s Berkshire Hathaway Inc.

After going private, the smaller companies may re-list again in Hong Kong, where they would aim to get higher multiples, according to Johnson Chng, head of financial services at Bain & Co. in Shanghai.

CDB Leads

“The cost of compliance being listed in the U.S. isn’t low,” Chng said. “The wave to delist in one market to go to another higher-multiple market, that trend will probably pick up.”

CDB’s $1.085 billion of commitments backing delistings of Chinese companies is 43 times more than China Citic Bank Corp.’s $25 million, the second-biggest amount, according to the Roth Capital data and company filings.

“China Development Bank has played quite a large part in going-private transactions,” due to its mission to help Chinese companies, said John Shum, a Hong Kong-based lawyer at White & Case LLP.

Feng Qihua, a spokeswoman at China Development Bank, didn’t return an e-mailed message and phone call seeking comment on its loans to Chinese companies delisting in the U.S.

’High Risk’

Fushi Copperweld’s shares have gained 12.3 percent to $8.95 since the company said on June 28 that it agreed to be bought for $9.50 a share. Its stock had fallen to a low in April at $5.81 as Muddy Waters accused the Beijing-based manufacturer of overstating production and possibly falsifying financial statements in a narrated slide show. The manufacturer “presents a high risk of fraud,” and overstated production at one of its factories by almost 13-fold, Muddy Waters said.

The company denied all the claims, which it called “vague and non-specific,” in a statement on April 11.

Hong Kong-based private-equity firm Abax Global Capital Ltd. and Fushi Copperweld chairman and co-chief executive officer Li Fu will acquire the company with a loan provided by CDB, according to a June 28 statement. CDB is an anchor investor for Abax’s yuan-denominated private equity fund, according to its website, providing capital and “access to deal sourcing through its extensive local network.”

“There are a few hundred Chinese companies listed in the U.S. and you’ve got to believe if it’s normal distribution of quality, there has got to be good ones as well as bad ones,” Donald Yang, a managing partner at Abax in Hong Kong, said by phone.

Disputed Reports

Messages left at Fushi Copperweld’s general phone line at headquarters and with Thomas Horton, global marketing director, seeking comment on the financing were not immediately returned.

Harbin Electric Inc., a maker of electric motors in northeast China that was also listed on theNasdaq, went private in November in a buyout financed by CDB.

The company’s stock slid in August after Citron Research said it “fabricated customers” and overstated revenue from corporations including Guiyang Putian Logistics Technology Co. and Daqing Xinchengtai Technology Co.

The Citron report was a “patchwork of fabricated evidence, falsehoods, selective use of information, and clearly biased and dishonest reporting,” Harbin Electric Chief Executive Officer and Chairman Yang Tianfu said in a statement responding to the allegations.

’Smoking Guns’

A person who answered the company’s main line yesterday said no one was immediately available to comment.

Investors received 20 percent more than they would have if they had sold their shares at the closing price on the day before the offer by company founder Yang Tianfu and Hong Kong- based Abax. The bid price of $24 per share was more than 11 percent less than the stock’s peak above $27 in 2007, according to the data.

China Development Bank’s Hong Kong branch financed the privatization with a $400 million loan, at 3.5 percentage points over the London interbank offered rate for the first 36 months, rising to 4.5 percent points thereafter.

“That was one that if it had gone much further everyone was confident they were going to find a lot more smoking guns,” DAC’s Groves said.

The deal followed the CDB-funded privatization of Shenzhen- based China Security & Surveillance Technology Inc. in September. The offer of $6.50 a share represented a gain of 58.5 percent on the previous day’s close.

’Tainted Glasses’

CDB doesn’t take deposits and raises money by selling bonds that have similar credit ratings as the Chinese government. The lender is the second-biggest bond issuer after the Ministry of Finance.

“People see the Chinese companies with tainted glasses, they start to wonder if there are any accounting scandals,” said Bain & Co.’s Chng. “It’s typical market behavior, you basically classify the entire sector into one.”

Shareholders of China TransInfo, which provides transportation management systems for government agencies, were offered a price of $5.8 a share by TransCloud Co., a Cayman Islands company owned by its CEO Xia Shudong. The offer represented a 12.6 percent premium over its close on Feb. 17, the last trading day before it announced it had received a going-private proposal.

“The debt financing is very important in closing these transactions,” Skadden’s Huang said. “Without the debt leverage the founders themselves really are not very keen to help the private-equity firms to get the deal done.”

Zhou Fan, China TransInfo’s head of investor relations, did not immediately reply to e-mailed questions concerning the financing for the delisting.

“The tricky part is knowing which of these companies are really undervalued and which may have some level of fraud going on,” David Grimm, a partner at Paul Hastings LLP in Hong Kong, said in a June 15 telephone interview. “The Chinese companies listed in the U.S have all been tarred with the same brush.”