China’s corporate bond market is facing its second default after a builder said it may fail to make a payment next week, fueling speculation the government is stepping back from its practice of bailing out borrowers.
The average yield on one-year interbank notes rated AAA jumped 10 basis points, the most in eight months, to 4.88 percent yesterday after Huatong Road & Bridge Group Co. said it may miss payment on a 400 million yuan ($64.4 million) note due July 23. One-year swaps have jumped 38 basis points this week, the biggest increase in more than a year, to 4.11 percent as of 12:24 p.m. in Shanghai.
Shanghai Chaori Solar Energy Science & Technology Co. (002506) marked China’s first onshore corporate bond default in March when it missed a coupon payment. Huatong Road would be the first to fail to pay both interest and principal, and would also be the first default in the interbank note market, the nation’s biggest bond bourse.
“If there isn’t a bailout, I think the impact will be greater” than in Chaori’s case, said Becky Liu, a Hong Kong-based strategist at Standard Chartered Plc. A default in a bond like Huatong Road’s, which differs from the Chaori securities that were exchange-traded, would mean that “the so-called implicit guarantee by the underwriter may be deemed impossible,” she said.
Huatong Road Chairman Wang Guorui is assisting authorities with an official investigation, according to a July 16 statement that didn’t elaborate. Wang was removed from the Chinese People’s Political Consultative Conference Shanxi Committee on July 9 for suspected violations of the law, according to an official statement and media report last week.
Geng Naizhuang, an official at the general office of Huatong Road, said the company is making all efforts to raise money to repay the debt, when reached by phone today. He said the underwriters and the local government are actively helping. According to regulatory requirements, the money must be transferred to the Shanghai Clearing House’s bank account by 4:30 p.m. on July 22, Geng added.
China Guangfa Bank Co., the lead underwriter for the notes, set up a work group and sent some people to Huatong Road to coordinate payment issues, Shanghai Securities News reported on its website yesterday, citing an unidentified person with the bank. Two calls to China Guangfa’s press officer went unanswered today.
Local governments had helped some companies avert missing payment deadlines, Yao Wei, China economist at Societe Generale SA, said earlier this year. CHTC Helon Co., a fiber maker which used to be called Shandong Helon Co., repaid 400 million yuan of notes in April 2012 even as it failed to make loan repayments.
Benxi Iron & Steel Group Co. canceled a sale of 2 billion yuan of bonds, citing recent fluctuations in market, according to a company statement on Chinamoney website yesterday. JuneYao Group Co. and China Nonferrous Metal Industry 14th Metallurgical Construction Co. also delayed bond issuances.
“It’s very likely” that Huatong Road will default, said Xu Hanfei, a bond analyst at Guotai Junan Securities Co., the nation’s third-biggest brokerage. “If it does, the event will have a big impact on investors’ risk sentiment.”
China Lianhe Credit Rating Co. cut the company’s rating to BB+ from AA- to reflect the builder’s high default risks, according to a statement from the risk assessor yesterday.
Chinese firms have the most debt globally after increasing borrowings to $14.2 trillion as of Dec. 31, surpassing the U.S.’s $13.1 trillion, Standard & Poor’s said in a June 15 report.
“The central bank, which regulates the interbank market, may permit defaults to help develop the corporate bond market by lowering moral hazards,” said Li Ning, a bond analyst in Shanghai at Haitong Securities Co., the nation’s second-largest brokerage.
Huatong Road said in its statement that it’s exploring various channels to raise funds to pay off the one-year bond, according to the statement. It owes 429.2 million yuan in interest and principal by the due date, it said. The builder, which was set up in 1998, had 5.8 billion yuan of debt and 10.7 billion yuan of assets as of March 31, according to a separate statement in April on the Chinamoney website. It reported a profit of 62.7 million yuan for the first quarter.
“The possible default of Huatong Road is another sign of increasing default risk among small and weak bond issuers,” said Christopher Lee, Hong Kong-based managing director of corporate ratings at S&P. “Builders are vulnerable as the property downturn has curtailed construction investment which weakens their order book and revenues.”
Companies in China are facing tougher operating conditions as growth looks set to cool to 7.4 percent this year, the slowest in more than two decades, according to a median estimate of economists surveyed by Bloomberg. The March implosion of closely held developer Zhejiang Xingrun Real Estate Co. also fueled concern that defaults could spread, particularly among companies connected to the cooling property market.
“Possibility of government intervention is low. Since last year, the new administration has been taking a more market-oriented approach,” said Ivan Chung, Hong Kong-based senior vice president at Moody’s Investors Service. “Regulators realize that if they provide support by intervening, it will also create more moral hazards, which is not good for the market.”
Huatong Road will likely default “because the company has tight liquidity and relies a lot on bank support to keep liquidity,” Chung said. More defaults may occur in sectors that are facing overcapacity, such as construction, steel and commodities, he said.
Huatong Road’s businesses include bridge and highway construction, real estate, coal, eco-friendly construction materials and agriculture-related projects, according to its website.
The Huatong and Chaori cases add to speculation that the world’s second-biggest economy is moving more toward a system in which troubled borrowers can no longer count on government help to pay off debts.
“More defaults will come,” said Haitong Securities’ Li.
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