Worst Asian Bond Hidili Shows Coal Mine Distress: China Credit

Asia’s worst-performing bonds in the past year were issued by a Chinese coal miner facing a critical three months as cash holdings deplete.

Hidili Industry International Development Ltd.’s November 2015 securities lost 2.3 percent since March 31 and 17 percent in the past year, the most among Asian issuers in Bloomberg’s USD Emerging Market Corporate Bond Index. Similar distressed notes, defined as those yielding more than 10 percentage points above Treasuries, gained 15.3 percent in emerging markets in the past 12 months, Bank of America Merrill Lynch indexes show.

Hidili is among 12 of 50 listed Chinese coal miners with debt-to-equity ratios over 100 percent, and the Sichuan-based company will run out of cash by September without new funding, Bloomberg-compiled data show. Moody’s Investors Service sees no industry upturn in the coming year as falling coal prices hurt miners from Mongolia to Indonesia. Chinese Premier Li Keqiang plans to shut more than 2,000 smaller mines by the end of 2015.

“Liquidity has certainly been a focus in the market,” said Ashley Perrott, the head of pan-Asia fixed income in Singapore at UBS Global Asset Management, which managed $674 billion as of March 31 and doesn’t own the notes. “I wouldn’t say it’s an untouchable sector. Some are under more pressure, not just because of coal prices but some things on the corporate side.”

Seeking Loans

Hidili is seeking to roll over loans or get new facilities to ensure it doesn’t run out of cash, Cathy Huang, a member of the company’s investor-relations team, said by e-mail July 4. It’s also considering asset sales and, if it gets a bank loan, doesn’t expect to face many problems redeeming its $380 million of notes in November 2015. She also said the “majority of Sichuan mines and part of the Guizhou mines” would be affected by the government’s decree that old and obsolete plants be shut.

The 8.625 percent 2015 notes traded at 53 cents on the dollar July 4 to yield 67.75 percent, according to prices compiled by Bloomberg. The securities, sold at par in October 2010, fell to an all-time low of 50 cents on May 9.

Coal miners including Hidili are at high risk they won’t be able to refinance their debt and need to boost liquidity, either by asset sales, or equity and cash injections, to avoid default, Simon Wong, a Moody’s senior credit officer in Hong Kong said by phone July 2.

China’s benchmark coal price at Qinhuangdao averaged 515 yuan ($83.05) a metric ton on June 29 versus 605 yuan on Dec. 29 and 745 yuan about two years ago, according to the China Coal Transport & Distribution Association. In Australia, the Newcastle coking benchmark fell to $70.35 a ton in June, the least since October 2009.

Industry Shakeout

China, the biggest producer and importer of coal, passed its biggest changes in environment protection laws in 25 years in April. In May, it announced plans to phase out 117 million tons of coal capacity this year and close obsolete coking plants including those operated by Hidili in Panzhihua city.

“We don’t like bonds issued by coal companies and are trying avoiding such issuances,” said Diao Huiyu, the head of fixed-income investment in Shanghai at Franklin Templeton Sealand Fund Management Co., which has about 14.5 billion yuan of assets under management. “Coal prices are low and profitability is still under huge pressure.”

Cash Crunch

Hidili’s cash fell 80 percent to 322.2 million yuan on Dec. 31 from a year earlier and it will run out in 2.55 months if operations don’t improve or it doesn’t get new funding, according to Bloomberg-compiled data. Free cash flow has been negative every year since 2006.

Slumping coal prices have hurt other miners and bondholders this year. In Indonesia, PT Bumi Resources’ $700 million of 10.75 percent notes are down 18.5 percent. Mongolian Mining Corp.’s $600 million of similar-maturity 8.875 percent bonds tumbled 11.6 percent. All three are rated more than six levels below investment grade by Moody’s.

“We expect margins and cash flows to come under pressure and that translates into weaker credit metrics for most of the Chinese coal players,” Moody’s Wong said. “Thermal and coking coal prices continue to weaken this year versus the average in 2013 to levels which are challenging even for the lowest-cost producers.”

Repayment Difficulties

Repayment difficulties among Chinese privately owned miners including Shanxi Liansheng Energy Co. and the failed Shanxi Zhenfu Energy Group emerged earlier this year amid slowing growth in Asia’s biggest economy. The number of trust products tied to coal miners maturing this year will almost quadruple, consulting firm Cnbenefit said in February.

China has implemented a so-called “mini-stimulus,” including loosening loan restriction on home purchases, easing banks’ reserve requirements and stepping up railway investment to help revive growth from the slowest in more than a decade.

The yuan was little changed at 6.2014 per dollar as of 10:38 a.m. in Shanghai. It’s weakened 2.4 percent this year, the worst performance among major Asian currencies tracked by Bloomberg. China’s 10-year government bond yield has declined 38 basis points since Dec. 31 to 4.1747 percent.

The March implosion of closely held developer Zhejiang Xingrun Real Estate Co. fueled speculation of a shakeout among the nation’s almost 90,000 real estate companies. The same month, Shanghai Chaori Solar Energy Science & Technology Co. became the first company to default in the onshore bond market.

Hidili announced several asset sales last September. It said in a June 27 statement it had finished offloading two mines in China for 914 million yuan, earning 10.6 million-yuan in profit. Proceeds will be used to repay debt, it said.

That won’t provide much comfort to investors, especially those who see no imminent industry turnaround, according to Brian Coulton, a London-based emerging-market strategist at Legal & General Investment Management, which managed 452 billion pounds ($776 billion) of assets at the end of 2013.

“Despite the recent easing of macro policy in China, it still looks to me as if the outlook for the coal sector is weak,” Coulton said by e-mail July 3. “It’s perhaps not so surprising that quite a few of the recent credit events in the shadow-finance sector have involved mining-related companies. I expect we’ll see more.”

— With assistance by David Yong, and Judy Chen

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