Investors reduce exposure to privately held mainland firms after 92pc plunge in pharmaceutical company's share price Investors wasted little time cutting their exposure to privately held mainland companies after Far East Pharmaceutical Technology's shares plunged 92.44 per cent on Thursday, sending several stocks sharply lower at the start of trading yesterday. Worst hit was Zhejiang Glass, which dived 69.61 per cent in just 35 minutes. Margin calls by brokers trying to 'protect themselves' probably contributed to the panic selling among retail investors, brokers said. Far East Pharmaceutical was suspended four minutes before the market closed on Thursday after the stock exchange failed to locate any authorised representatives able to explain why the company's shares were being sold off. The Taiwanese-controlled pharmaceutical company's receipt of a US$80 million syndicated loan a little over a month ago fuelled speculation of possible fraud. Xinao Gas Holdings, Chaoda Modern Agriculture (Holdings) and Geely Automobile Holdings were also dumped yesterday, with early losses ranging from Geely's 12.9 per cent to Chaoda's 22.85 per cent. Apart from Geely, which has been under pressure all week due to negative news surrounding the mainland car sector, trading volumes were much bigger than normal. 'Everybody was looking for 'the next one' but the selling was purely rumour-driven,' said Miles Remington, the head of sales trading at BNP Paribas Peregrine. Once the initial selling was over and the dust had settled, however, it emerged that there was plenty of buying support as most of the affected stocks benefited from almost equally sharp rebounds. A similar trading pattern was evident in several of the other so-called 'P chips'. At the end of the day, Zhejiang Glass was down 14.36 per cent, Xinao Gas 11.53 per cent and Chaoda 3.06 per cent. Geely settled 1.61 per cent higher. Meanwhile, Far East Pharmaceutical managing director Barton Tso Ming-sing said he did not know the whereabouts of chairman Cai Chongzheng, save that he was in the mainland, and reiterated that the company was operating normally. 'We welcome banks, fund managers and media to visit our factories and offices in the mainland anytime,' Mr Tso said, adding that the company had drawn down US$75 million of the syndicated loan and used $52 million to repay previous borrowings. It used an additional $5 million to fund mainland operations and still has $18 million deposited with Standard Chartered. 'Our bank account with Standard Chartered has not been frozen,' Mr Tso said. Executives at Standard Chartered, the acting agent for the 13-bank syndicated loan, said it would be 'inappropriate' for them to comment. Other banks in the syndicate also declined to comment. Debt restructuring specialists said creditors would call in the loan 'only as a last resort'. 'At this minute they would typically be in information-gathering mode,' said David Brown, a partner with PricewaterhouseCoopers specialising in debt restructuring. 'It is quite possible that none of the loan covenants have been breached ... but typically in situations like this, the bankers would appoint accountants to have a look and provide an independent view. They would leave liquidation to the last resort.' Bank of China Group provided US$16 million to the syndication, with BOC Hong Kong taking $8 million, Chiyu Bank $5 million and BOC Macau $3 million. RZB Osterreich and its co-managers of the syndication, Standard Chartered, and China Merchants Bank, each took US$10 million, while Standard Chartered, Rabobank and HSH Nordbank took $7 million each. The balance was taken by OCBC, Krung Thai Bank, Citic Ka Wah Bank and Indover Bank. Analysts expressed surprise at the comparatively generous loan pricing secured by the unrated mid-cap borrower with just a four-year track record as a listed company. A first syndication of US$31 million in May last year was priced at 150 basis points above the London interbank offered rate (Libor). Syndicate members could go to this wholesale money market to raise the money to fund their portion of the loan, earning a 'spread' on the transaction. The second loan was made at a margin of just 125 basis points, reflecting the keener pricing which syndicate members were prepared to offer to secure the business. The margins are well above the terms that big blue-chip borrowers can demand. In February, for example, developer Sun Hung Kai Properties negotiated a two-tranche HK$5.5 billion revolving credit syndicated loan with maturities of five and seven years at margins above Hibor of 27 and 37 basis points, respectively. For Far East Pharmaceutical to be granted an unsecured loan at a premium of less than 100 basis points above the margins charged to such a big blue-chip borrower reflected the desperation of banks to do business in a lacklustre loan environment, analysts said. Additional reporting by Nichole Chan
