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Wednesday, 26 November 2014

Divorce risk

New risk factor for China stocks: divorce

Broken marriages are an unwelcome new risk factor for China investors. Shares in Longfor Properties dropped 4 percent on Nov. 20 on news that its founding couple had divorced and split their controlling stake, sparking fears of a covenant breach. Family feuds are growing more common, and investors are taking a share of the strife.

Wu Yajun gave up 29 percent of developer Longfor’s shares to her ex-husband, and lost her title as China’s richest woman. For investors, the worry was that if he chose to sell down that stake, the couple together would own less than 50 percent of the company, which means a covenant breach could be triggered and accelerated loan payment may have to follow, according to Barclays.

Longfor is not the first Chinese company to be shaken by a marital rift. The ex-wife of Tudou founder Gary Wang got a Shanghai court to freeze his entire stake. This case held up the internet video site’s New York initial public offering for half a year. Finally listed in 2011, its shares struggled, and the company was taken over by larger rival Youku a year later. The founder of Shenzhen-listed public relations company Blue Focus barely clung to his own role as the top shareholder after giving almost half of his stake to his ex-wife in 2011.

Divorces are costly for rich people everywhere in the world, but losing half a business empire is less common. What makes China different is a large number of companies still in founders’ hands, and the common presence of husband and wife teams. Prenuptial agreements are rare, probably because few founders dreamed of getting so rich so quickly, while much of their wealth is still tied up in shares. Where there’s no prior agreement, Chinese courts tend to split divorcing couples’ wealth in half.

Almost 3 million couples parted ways in 2011, up 7 percent from a year earlier, official figures show. As divorce rates rise in China, investors should note that entrepreneurs’ private wobbles can have public consequences.

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Shares of Chinese property developer Longfor fell by more than 4 percent on Nov. 20 after Bloomberg reported that chairwoman Wu Yajun had divorced her husband Cai Kui and transferred a stake of around 29 percent in the company to him.

The divorce was filed on Aug. 6, according to a report from Barclays, which cited Longfor management. Wu’s stake in Longfor dropped from a combined 72 percent to 43 percent, according to filings from Hong Kong’s stock exchange.

The price of Longfor’s bonds fell slightly on Nov. 20.

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