April 3 (Bloomberg) -- A Chinese building materials producer will avert what would have been the second default in the nation’s onshore bond market as its guarantor said it would step in to help, two people familiar with the matter said.
Closely held Xuzhou Zhongsen Tonghao New Board Co., based in the eastern province of Jiangsu, missed a 10 percent coupon payment due March 28 on securities sold last year, the two people said, asking not to be identified because the details are private. Sino-Capital Guaranty Trust, the guarantor for the 180 million yuan ($29 million) of notes, will fulfill its responsibilities, the two people said.
Any default by Xuzhou Zhongsen would have been the first in the nation’s private-placement market for high-yield bonds from small- and medium-sized enterprises unveiled in 2012, said Yang Aibin, a general manager at Pengyang Investment Management Co. China’s onshore note market experienced its first default last month when Shanghai Chaori Solar Energy Science & Technology Co. missed payment on its debt.
“There will continue to be a mixture of bond defaults and too-big-to-fail, or too-entangled, cases,” said James Zhao, chief investment officer in Beijing at the international department of CCB Principal Asset Management Co. “It’s now up to the market to find the pattern and investors will now have to figure out who is creditworthy and who is more likely to fail. It’s a positive development.”
A receptionist who answered the phone at Xuzhou Zhongsen Tonghao yesterday said no one was immediately available to comment. The line at Sino-Capital Guaranty Trust was busy when called three times yesterday and two calls on April 1 went unanswered.
Xuzhou Zhongsen’s missed coupon payment was first on April 1 in the 21st Century Business Herald newspaper.
Mounting nonpayments amid an economic slowdown in China may signal the government has backed off from its practice of bailing out companies with bad debt. Premier Li Keqiang said in March at the conclusion of an annual legislative gathering that defaults in some financial products may be unavoidable as authorities tighten credit.
China started its private junk bond market in June 2012 to give small companies a way of raising funds outside the network of so-called shadow banks. Smaller companies seeking to sell debt as part of the trial program wouldn’t have to meet net asset or profit requirements, the Shanghai and Shenzhen stock exchanges said in May 2012.
Concerns have increased that defaults may spread as the world’s second-largest economy cools. Policy makers have set a 7.5 percent growth target for 2014, which would be the slowest since 1990. Credit-default swap contracts insuring the nation’s debt against non-payment have climbed 8.5 basis points this year to 88.5 basis points, prices from data provider CMA show.
“There is a high probability that credit risk will increase this year as macro-economic conditions weaken,” said Li Lei, an analyst in Beijing at China Minzu Securities Co. said in an e-mail on April 1. “Defaults among some small companies can be regarded as a necessary and healthy stage of development in the onshore bond market.”
The number of Chinese companies whose debt is double their equity has surged since the global financial crisis, suggesting more defaults may come, data compiled by Bloomberg show. Publicly traded non-financial corporates with debt-to-equity ratios exceeding 200 percent have jumped 57 percent since 2007.
“SME private bonds are now facing relatively high risk,” said Pengyang’s Yang, who is based in Beijing and was formerly head of fixed income at China Asset Management Co. “We expect more defaults to come in this area, especially those private enterprises without guarantees.”