China Defaults Seen Rising After Sinosteel Misses Payment

Updated on
  • Moody's says coal, steel and shipbuilding have highest risks
  • Sinosteel Co. failed to repay interest payment Tuesday

China bond defaults are forecast to climb after a state-owned steelmaker missed an interest payment, raising questions about the government’s commitment to stand behind such firms.

QuickTake China’s Debt Bomb

Sinosteel Co. failed to pay interest due Tuesday on 2 billion yuan ($315 million) of 5.3 percent notes maturing in 2017 after saying it will extend the deadline as it plans to add a unit’s stock as collateral. That came after the National Development and Reform Commission planned to meet noteholders and ask them not to exercise a redemption option on Tuesday to force full repayment, people familiar with the matter said last week.

Chinese authorities are weeding out weak state firms that Premier Li Keqiang called zombies. Australia & New Zealand Banking Group Ltd. warned that rising debt in the sector may drag economic growth down to as low as 3 percent. Two state-owned companies, Baoding Tianwei Group Co. and China National Erzhong Group Co., reneged on obligations earlier this year, according to China International Capital Corp. and China Bond Rating Co.

“Sinosteel’s default means we will see more and more real bond defaults, in which investors may not get full repayment, in China,” said Ivan Chung, an associate managing director at Moody’s Investors Service in Hong Kong. “The government may want to reduce its intervention in default cases and let market forces play a bigger role.”

Balancing Act

Sinosteel’s failure to pay interest on time constitutes a default, according to Industrial Securities Co., Haitong Securities Co. and China Merchants Securities Co. China Bond Rating Co. said in a report Wednesday if Sinosteel bond investors had agreed to the delay of interest payment, it didn’t constitute a default, whereas if they hadn’t, it did. Sinosteel hasn’t said in its statements whether it got permission from investors, and two calls to the company Wednesday went unanswered.

Flagging authorities’ balancing act as they try to liberalize markets while preventing turbulence, Li said last week the government will prevent systemic risks and banks should not cut or withdraw lending to companies which are in “temporary” difficulties.

High Risk

The coal mining, steel and shipbuilding industries have the highest default
risks and there may be more bond defaults next year, according to Chung at Moody’s. China Merchants analysts led by Sun Binbin said in a report Tuesday among steel bond issuers investors should watch default risks of Sansteel Minguang Co., Liuzhou Iron & Steel Co. and Xining Special Steel Co. because of their low cash inflows.

Two calls to Sansteel went unanswered. An official at Liuzhou Iron who wouldn’t give his name declined to comment. Two calls to Xining Special went unanswered.

The yield on Sinosteel’s 2017 bond jumped 20.1 percentage points to 25.43 percent on Tuesday, the biggest increase since the notes were issued in 2010.

Sinosteel Co. said Friday that it had postponed a date at which investors can demand early repayment on its 2017 securities. Investors can’t sell back the debentures until Nov. 20, after an original option date of Oct. 20, it said.

“It’s more difficult to ensure investors can get full repayment” on Chinese bonds that encounter problems now, said analysts led by Haitong Securities’ Jiang Chao in a report Tuesday. “Investors should watch for credit risks and focus their investment on higher-rated bonds.”