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Chaori Bondholders Weigh Suit After China’s First Default

Holders of bonds sold by Shanghai Chaori Solar Energy Science & Technology Co. will consider a lawsuit to force payment after the company became the first to default on onshore corporate debt in China.

Investors in the solar-panel maker’s 2017 securities will meet on March 26, according to a filing to the Shenzhen Stock Exchange yesterday from China Securities Co., which managed the offering in 2012. Noteholders will discuss giving the brokerage the right to participate in restructuring the company and in the sale of collateral for the defaulted securities.

“Bondholders may get principal and interest if the company can be restructured,” said Li Ning, a bond analyst in Shanghai at Haitong Securities Co., the nation’s second-biggest brokerage. “If a third-party takes over ownership and provides capital, the company may be able to repay the overdue obligations.”

Chaori paid just 4 million yuan ($652,000) of an 89.8 million yuan coupon payment due March 7. The default is the first in China’s $4.2 trillion bond market since the People’s Bank of China started regulating the industry in 1997. The failure is stoking speculation more companies may miss debt payments after the government pledged to let markets take a “decisive” role in the economy.

Source: AFP/Getty Images

Chinese national flags are seen under a signage of Shanghai Chaori Solar Energy Science & Technology Co. near their faculties in Shanghai on March 8, 2014. Close

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Source: AFP/Getty Images

Chinese national flags are seen under a signage of Shanghai Chaori Solar Energy Science & Technology Co. near their faculties in Shanghai on March 8, 2014.

Recovery Prospects

Most Chaori bonds appear to be held by the original retail investors and “it’s less common for retail investors to galvanize the support, form a requisite group and pose a real threat, if you like, to the company,” Mark Hyde, Hong Kong-based head of Asia Pacific finance practice at Clifford Chance LLP, said by phone today. “Deferment of amount due, coupled with potential additional equity, is likely to be more beneficial than formally making demands at this stage.”

China Securities will rely on the roster of Chaori bondholders as of July 5 maintained by China Securities Depository & Clearing’s branch in Shenzhen, according to yesterday’s exchange filing.

Liu Tielong, vice president of Chaori, declined to comment when asked about the filing details by phone today. The company has outstanding bank loans and no trust loans, he said.

The solar-cell maker’s failure came after China Credit Trust Co. was bailed out in January on a 3 billion yuan trust product tied to a failed coal miner. A similar product created by Jilin Province Trust Co. has missed five payments and the sixth, which is the last, is due today, Shanghai Securities News reported last month. The trust company didn’t immediately reply to e-mailed questions and no one was available to comment when the company was called.

Trusts

The number of trust products tied to miners maturing this year will almost quadruple, according to Cnbenefit, a consulting firm based in the southwest city of Chengdu. Products linked to property face a 50 percent jump in repayments this year, according to estimates from Haitong.

“You’re going to see trust products default, you’ll see wealth management product defaults, you’ll see bond defaults like we just did, you might even see local government financing vehicles teeter on the brink,” Leland Miller, the New York-based president of China Beige Book International, said in a Bloomberg Television interview today. “It’s injecting risk into the Chinese system. It’s very positive but it might make investors a little bit nervous in the meantime.”

Sinovel, Star Lake

Sinovel Wind Group Co. had two of its bonds placed on a credit watchlist by China Lianhe Credit Rating Co. last month, according to a Shanghai Stock Exchange statement. The company’s 2.6 billion yuan of 6 percent notes due 2016 and sold to investors at par in December 2011 were trading at 86.35 percent of face value today, exchange prices show.

Beijing-based media manager for Sinovel Wind Group, Bao Zhen, declined to comment when contacted today.

Companies with bonds that lack guarantees and have higher credit risks similar to the Chaori Solar debt include Zhuhai Zhongfu Enterprise Co., Star Lake Bioscience Co. and Nanning Sugar Industry Co., Haitong’s Li said last week.

An official at Zhuhai Zhongfu who asked not to be identified said the company won’t have any problem paying interest on its bonds this year because manufacturing is normal and its relationships with banks are good.

An official in Star Lake’s investor relations department who asked not to be identified wouldn’t comment when called last week and there was no reply to faxed questions. An official in the securities department of Nanning Sugar said last week the company couldn’t answer questions before March 14, when its annual report is due.

Chaori Solar will seek buyers for its solar farms in Greece, Bulgaria, Italy and the U.S., the company’s Liu said in an interview yesterday. Chinese banks that had previously agreed to provide 800 million yuan in loans if the company faced a temporary cash squeeze “have no willingness to lend,” he said.

To contact Bloomberg News staff for this story: Ludi Wang in Beijing at lwang191@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net; Judy Chen in Shanghai at xchen45@bloomberg.net

To contact Bloomberg News staff for this story: Ludi Wang in Beijing at lwang191@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net; Judy Chen in Shanghai at xchen45@bloomberg.net To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net; Gregory Turk at gturk2@bloomberg.net Andrew Monahan

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