China Bond Sales Axed as Looming Default Boosts Junk Yields

Four companies pulled domestic bond sales and yields on speculative-grade debt jumped the most since November after Shanghai Chaori Energy Science & Technology Co. warned of what would be China’s first onshore default.

The yield on five-year AA- notes rose eight basis points to 7.77 percent yesterday, the biggest increase since Nov. 15, ChinaBond data show. The spread over similar-maturity government bonds widened seven basis points to 356 basis points. Ratings of AA- or below are equivalent to non-investment grades globally, according to Haitong Securities Co., the nation’s second-biggest brokerage.

Chaori Solar said on March 4 it will only be able to pay 4 million yuan ($654,193) of an 89.8 million yuan coupon due tomorrow on its 1 billion yuan of March 2017 bonds. A missed payment would be China’s first default among publicly traded onshore debt since the central bank started regulating the market in 1997, according to Moody’s Investors Service.

“Bond yields have fallen since the start of the year and we see the need for some correction now, not only due to the credit event but also the fact liquidity conditions have bottomed out,” said Chen Qi, UBS Securities Co.’s head of China rates strategy in Shanghai. “There’ll be a slowdown in primary bond offerings.”

Sales Scrapped

Suining Chuanzhong Economic Technology Development Co. will delay a planned 1 billion yuan offering due to “serious fluctuations in the bond market following Chaori Solar’s statement,” it said in a statement on ChinaBond’s website yesterday. Taizhou Kouan Shipbuilding Co. said it will postpone a 300 million yuan sale because of “big fluctuations in the market.”

Xining Special Steel Group also canceled a planned 470 million yuan-bond sale citing “recent market changes,” while Qunsheng Group Co. scrapped a 500 million yuan bond offering because of a lack of demand.

A Chaori Solar default would further highlight strain in China’s $4.2 trillion bond market after a trust product issued by China Credit Trust Co. was bailed out in January. China’s corporate bond market totaled 8.7 trillion yuan at the end of January compared with 800 billion yuan at the end of 2007, according to Bank of America Corp. estimates.

Soros, Gross

Chaori Solar’s notes were priced at 56.55 percent of face value yesterday, down from 76.22 percent the day before, according to ChinaBond valuations. The yield jumped to 34.35 percent from 20.28 percent, the data show.

Billionaire investors George Soros and Bill Gross have drawn parallels this year between the situation in China now and that in the U.S. in the run-up to the global financial crisis. A default may be China’s “Bear Stearns moment,” prompting investors to reassess credit risks as they did after the U.S. lender was bailed out in 2008, Bank of America Corp. strategists wrote yesterday.

Borrowing costs for China’s high-yield debt issuers may jump 200 basis points, or 2 percentage points, if Chaori Solar doesn’t pay, Yang Kun, a Shanghai-based bond analyst at Guotai Junan Securities Co. said yesterday.

Former People’s Bank of China adviser Li Daokui was cited as saying in a China Securities Journal report today however that there isn’t any need to panic about a bond default by Chaori Solar because it only reflects normal volatility in the bond market.

Bailouts Expected

Industries with overcapacity such as solar, steel and shipbuilding are struggling under the weight of higher borrowing costs. Just three to five “leading” solar companies will remain in China by 2017 and account for 80 percent of the market, Trina Solar Ltd. Chairman Jifan Gao said in an interview in January.

“The solar industry has been under significant pressure for a long time partly because they’ve been telegraphing potential defaults for a while,” Michele Barlow, Bank of America’s head of Asia-Pacific credit research in Hong Kong said in a March 5 report. “A default will still be a surprise to some participants because many expect bailouts.”

The yield on Sinovel Wind Group Co.’s 200 million yuan of 6.2 percent notes due December 2016 rose 109 basis points to 15.95 percent today, according to Shanghai Exchange data. That’s the biggest jump since Jan. 9 on the debt sold by the Beijing-based solar company in December 2011.

The yield on Zhuhai Zhongfu Enterprise Co.’s 590 million yuan of 5.28 percent notes due May 2015 jumped 95 basis points to 24.18 percent, exchange-traded prices show. That’s a record high for the bonds issued by the beverage packaging maker in May 2012. A basis point is 0.01 percentage point.

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