Another Chinese Firm Defaults on Its Dollar Bond

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China’s credit markets sent their latest sign of stress Friday as coal importer Winsway Enterprises Holdings Ltd. became the nation’s second company to default on a dollar-denominated bond this year.

The Hong Kong-listed company isn’t able to pay $13.2 million of semi-annual interest due Friday on $309.3 million of notes that mature next year, according to a Hong Kong stock exchange filing on Friday. A 30-day grace period expired May 8 after it skipped the payment April 8 and hired advisers to restructure its debt.

The failure sends a signal that prices of coking coal used in steelmaking are far from rebounding as the government steps up efforts to curb pollution and China’s economic slowdown deepens. Homebuilder Kaisa Group Holdings Ltd. defaulted last month, becoming the first Chinese developer to miss interest obligations on its U.S. currency debt, while underground mall developer Renhe Commercial Holdings Co. bought back its dollar notes at a discount in a so-called distressed exchange.

“Coal prices have been falling sharply over the years and credit quality will have deteriorated as a result,” Sandra Chow, a Singapore-based analyst at independent research firm CreditSights Inc. said by phone Thursday. “It’s inevitable that one or two will feel more financial stress than others, depending on their cash reserves.”

Winsway said in the filing Friday that “discussions with potential equity investors in connection with a potential equity investment” by issuing new shares are continuing. Winsway said it “will make a further announcement regarding its discussions with bondholders and potential equity investors when appropriate.”

‘Untested’ Law

The recent missed payments are the latest challenge for foreign investors in China who may need to navigate unfamiliar means of recourse to a defaulted company’s assets.

“The risk for U.S. creditors is China’s bankruptcy law is pretty much untested,” said Kevin Starke, an analyst who specializes in distressed investments at CRT Capital Group Inc. in Stamford, Connecticut. “It’s difficult to get access to assets because they are a couple of levels removed. Complicated structural charts are making it very difficult to invest in distressed here in the U.S., let alone in China.”

Winsway’s 8.5 percent 2016 notes, sold to investors at par, or 100 cents on the dollar in April 2011, fell 1.85 cents, the most in more than a week, to 28.3 cents on the dollar on Thursday in Hong Kong, Bloomberg-compiled prices show. They’ve lost 10.12 percent this year and tumbled 17.97 percent in 2014. Standard & Poor’s cut Winsway to selective default last month, saying it was unlikely the overdue coupon would be paid.

Dwindling Cash

Winsway sold $500 million of the securities in 2011. It bought back some of them from the market and via a tender offer in 2013. Its cash had dwindled by 78 percent to HK$438.6 million ($56.6 million) as of Dec. 31 from a year earlier, data compiled by Bloomberg show.

Coking-coal prices have dropped 2.6 percent this year, after tumbling 55 percent in the four years through 2014. Indonesian miners PT Bumi Resources and PT Berau Coal Energy are also restructuring $2.325 billion of their outstanding bonds post the price slump. SouthGobi Resources Ltd., a Mongolian coal miner has also sought more funding to stay afloat.

“Coking-coal prices stayed low for some time and if this situation drags on for another 12 months, companies may soon exhaust their liquidity,” Dylan Yeo, a credit analyst in Hong Kong at Moody’s Investors Service, said by phone on Thursday. “By then, it wouldn’t be surprising to see more defaults along the way in the sector.”

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