Cloud Live Spooks Chinese Junk Bonds Amid Second Onshore Default

Chinese junk bonds fell after Cloud Live Technology Group Co. said it will miss payments due today as the nation braces for its second onshore corporate default.

The yield on solar-cell maker Baoding Tianwei Baobian Electric Co.’s notes due 2018 climbed seven basis points to 7.49 percent after Cloud Live’s statement late Monday, according to exchange data. Fertilizer company Inner Mongolia Nailun Group Inc.’s 2018 bonds surged 50 basis points to 21.06 percent. Higher-graded securities showed little reaction.

“The default will probably have an impact on lower-rated bonds sold by privately owned companies,” said Yang Feng, a fixed-income analyst in Beijing at Citic Securities Co., the nation’s biggest brokerage. “The market has mostly expected it.”

President Xi Jinping’s anti-graft probe and the slowest economic growth since 1990 are stoking default concerns a year after Shanghai Chaori Solar Energy Science & Technology Co. became the first company to default on onshore bonds. Companies in Asia’s largest economy need to repay 1.5 trillion yuan ($242 billion) of local-currency notes in the period to June 30, the most for a quarter in Bloomberg data going back to 1998.

Cloud Live, the Beijing-based big data provider, which shifted into that industry in July after corruption probes hurt its former restaurant business, will fail to meet an April 7 deadline to pay investors who had exercised an option to sell back notes, the company said in statements to the Shenzhen stock exchange on Monday. Failure to pay would constitute the second default on an onshore yuan debenture.

Yields Soar

Cloud Live issued the bonds in question in 2012 with a 6.78 percent coupon. The yield on the securities jumped over 18 percent as of April 1 from 8.9 percent on Dec. 31, exchange data show, before trading was suspended from April 2. Investors had an option to sell them back to the company April 5, with the effective payment deadline being April 7, the first business day after holidays on April 5-6.

Cloud Live said on Monday it still lacks 240.6 million yuan needed to make note and interest payments due April 7 after raising 161.4 million yuan. Pengyuan Credit Rating Co. cut the company’s rating from BB to CC, according to the company’s exchange statement on April 3.

Pengyuan also said that Inner Mongolian Nailun owed overdue interest on a loan in a Feb. 9 report. It has to repay 540 million yuan of principal and interest on May 2015 bonds on May 20 and has an interest payment due on a separate note on May 5, Chinalin Securities said March 12.

Inner Mongolian Nailun’s and Baoding Tianwei Baobian Electric’s 2018 bonds are locally graded at A+. Chinese corporate bonds rated AA- or lower are considered as junk bonds, according to Haitong Securities Co.

Principal Default

Haitong Securities and China International Capital Corp. said April 2 in reports that Cloud Live would be the first default on a bond principal payment. Shanghai Chaori failed to fully pay interest on its bond last year. Premier Li said on March 15 the government will prevent any systematic fallout while tolerating individual cases of financial risk.

Cloud Live’s shares rose 8.6 percent to 8.30 yuan per share as of 11:30 a.m. in Shanghai.

This isn’t the first time efforts to clean up the world’s second-biggest economy have touched the company. Cloud Live was formerly Beijing Xiangeqing Co., which operated a chain of restaurants. It said in July it was shifting into the Internet business and changed its name in August.

The company’s abrupt turn into the “totally unrelated” information-technology industry came after it shuttered some stores in 2013, according to a documentary on Xi’s anti-graft drive that aired on the official China Central Television on Dec. 17.

— With assistance by Judy Chen

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