Another Chinese SOE Flirts With Default as Broker Calls It Early

  • CICC called Erzhong default early, ahead of Monday deadline
  • Not a default under the Chinese definition, Ping An says

A brokerage report Friday saying the parent of China National Erzhong Group Co. won’t pay bond interest due today is prompting speculation over whether the smelting equipment maker will become China’s second state-owned company to default on onshore bonds.

Analysts from China International Capital Corp. said the firm’s controlling shareholder China National Machinery Industry Corp. agreed with bondholders not to pay interest on 1 billion yuan ($157 million) of 2017 notes and a 2015 debenture from unit China Erzhong Group Deyang Heavy Industries Co., without saying where it got the information. While interest on the 2017 notes is due Monday, not everyone’s rushing to make a call.

“It’s uncertain if it’s time to call it a default because there is no official statement about whether China National Machinery will pay the interest,” said Zhang Li, a bond analyst at Guotai Junan Securities Co. “If it won’t pay the interest, it will be a default. But even if it’s a default, we should focus more on the fact that investors will get all the principal back.”

The confusion shows the mainland’s unfamiliarity with defaults, with just four Chinese companies reneging on onshore bonds since the market started in 1981. China National Erzhong and its subsidiary didn’t offer any more clues on Sept. 22 when they said China National Machinery Industry would “take over” the bonds after a local court accepted a creditor’s restructuring request. They haven’t issued any statements since on the takeover.

Zhu Kai, an official working in the financial department of China National Erzhong, declined to comment on the CICC report or if the parent was paying interest on the notes.

Not Yet

“Onshore analysts haven’t reached a conclusion on if Erzhong has defaulted,” said Shi Lei, head of fixed income research at Ping An Securities Co. in Beijing. “Even if Erzhong’s parent doesn’t pay interest now, it doesn’t mean it won’t pay interest in the future. According to the international market’s definition, Erzhong may have defaulted, but according to the Chinese market definition, it is not yet.”

China National Erzhong sold the 1 billion yuan of 5.65 percent five-year securities in 2012, according to data compiled by Bloomberg. China Erzhong Group Deyang Heavy Industries has 310 million yuan of seven-year bonds due on Oct. 14.

Ivan Chung, a senior vice president at Moody’s Investors Service in Hong Kong, said China National Erzhong will default if investors don’t get full payment, including interest.

“We would say a company offered a distressed exchange if bondholders are forced to accept a takeover plan before the due date and didn’t get all the money,” Chung said. “Even though credit recovery is fast, a distressed exchange would still be considered a default according to Moody’s definition.”

— With assistance by Judy Chen

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