China's Latest Default Foretold in Creditors Calling CFO Nonstop

China's Shanshui Cement Heads for Default
  • Cement maker becomes at least 6th local-market default of 2015
  • Shanshui dollar bonds tumble as company files for liquidation

The buzzing mobile phone foretold trouble.

During an interview last month at the posh Shangri-La Hotel in Hong Kong, Henry Li stepped aside four times in an hour to take calls. Creditors were frantically trying to connect with the chief financial officer of China Shanshui Cement Group Ltd., and they wanted to know one thing: Was his company about to default?

"Honestly speaking, banks are very worried about us, as you can tell from the fact that I’ve received many calls,” said Li, sitting alongside Shanshui Chairman Zhang Bin as they discussed the firm’s predicament with Bloomberg on Oct. 14.

On Wednesday, the creditors got their answer. Shanshui, reeling from China’s economic slowdown and a shareholder campaign to oust Zhang, said it will fail to pay 2 billion yuan ($314 million) of bonds due on Nov. 12, making it at least the sixth Chinese company to default in the local note market this year. Analysts predict it won’t be the last as President Xi Jinping’s government shows an increased willingness to allow corporate failures amid a drive to reduce overcapacity in industries including raw-materials and real estate.

‘Not Sustainable’

Shanshui’s troubles -- it will also default on dollar bonds and file for liquidation -- reflect the fallout from years of debt-fueled investment in China that authorities are now trying to curtail as they shift the economy toward consumption and services. In the latest sign of that transition, data Wednesday showed the nation’s October industrial output matched the weakest gain since the global credit crisis, while retail sales accelerated.

“Debt wasn’t a problem during the boom years because profits kept growing,” Zhang said last month. "But it’s not sustainable when the economy slows."

Shanshui’s total debt load as of June 30 was four times bigger than in 2008, according to data compiled by Bloomberg.

Defaults in China’s local corporate bond market have mounted this year as the economy weakened. Sinosteel Co. last month failed to pay interest on 2 billion yuan of notes maturing in 2017. Baoding Tianwei Yingli New Energy Resources Co., whose majority holder was until last year the world’s biggest solar panel company by shipments, failed to make a complete payment on a note due Oct. 13.

Shareholder Tussle

Aside from weakening demand, Shanshui has grappled with a shareholder fight for control since April that stymied its access to financing and forced early repayment of some debts. Its largest investor, Tianrui International Holding Co., has been trying to change Shanshui’s board. Two other shareholders, China National Building Material Co. and Taiwan’s Asia Cement Corp., have said they are considering terms of a possible offer to buy the company.

"Shanshui’s default is mainly because of the fight among shareholders,” said Sun Binbin, a bond analyst at China Merchants Securities Co. in Shanghai.

When reached by phone on Wednesday, Li said Shanshui is still fundamentally sound and hopes to work with creditors to restructure.

An ad-hoc committee of noteholders has been formed to engage with Shanshui about its dollar bonds, according to a statement from law firm Akin Gump Strauss Hauer & Feld. The firm, which has been named to represent the committee, plans to hold a conference call for bondholders on Wednesday, it said. Shanshui’s 2020 dollar debentures slid 17 cents to a record low 65 cents as of 7:55 p.m. in Hong Kong.

"For offshore creditors, recovering value from Shanshui’s dollar bonds will be a long process given that onshore creditors will be all over the company first in the case of liquidation,’’ said Zhi Wei Feng, credit analyst at Standard Chartered Plc in Singapore.

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