Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

It was a great trade while it lasted. Bonds of West China Cement rallied in the past eight months after its bigger and more profitable rival, Anhui Conch, announced plans to acquire a controlling stake. Now the deal is off, and creditors are left worrying about a downgrade -- even the company's solvency -- amid a price war in the oversupplied market.

West China said late Thursday that conditions for the Anhui Conch purchase, including approval by China’s commerce authorities, weren’t met by the June 30 deadline. West China's dollar bonds due in 2019 have dropped 4.7 cents on the dollar since Tuesday -- when the company's stock suddenly plunged by almost one-third, before any announcement on the fate of the deal.

Rise and Fall
West China Cement's dollar bonds were heading back to where they were before the Anhui plan
Source: Bloomberg

For bondholders, the acquisition plan was a gift. Investors who bought securities of a highly indebted cement company suddenly held high-quality paper. Anhui Conch is the most profitable cement company in China, whose industry comprises more than 3,300 firms, some of which may face bankruptcy. It's also rated A- by S&P Global Ratings, well within investment grade and seven levels above West China Cement. 

Not only are those bondholders once again holding junk, their junk looks increasingly unappetizing. Before the merger announcement, S&P was signaling that it might downgrade West China further. The credit scorer had put the company on a negative outlook in 2012, less than two years after dropping it into the single-B category, and was due for a decision when Anhui came in and changed the game. Moody's and Fitch had both improved their outlook after an initial share sale to Anhui improved the firm's leverage. 

They could change their minds now that the tie-up is off, especially given that West China has added a lot of short-term debt in the past year.

Got Credit?
West China Cement increased short-term borrowings after it first sold shares to Anhui Conch
Source: Company filings; Bloomberg

West China's gross profit of 464 million yuan ($69.8 million) was less than one-sixth of the 2.8 billion yuan in liabilities it had due within a year, according to its Dec. 31, 2015 balance sheet -- the last time the company reported numbers. Its margins also are shrinking amid price competition in Shaanxi province, where it mainly operates. 

Hard Flooring
West China's margins are shrinking amid a price war and slowing construction activity
Source: Company filings; Bloomberg

The bit of solace for bondholders now is that Anhui remains an important part of West China, with its 21.2 percent shareholding. Creditors must cling to the hope that the companies will act together to curb excessive competition in Shaanxi, and that if West China reaches the brink, a minority owner could bail it out.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Christopher Langner in Singapore at

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Paul Sillitoe at