Sound Global at 50% Default Risk After Cash Shortfall, S&P Says

There’s a 50 percent chance that Sound Global Ltd. may default in the next six months after the water treatment company said auditors identified a cash shortfall and that it would miss a promised filing deadline, according to Standard & Poor’s.

Auditors found a discrepancy of about 2 billion yuan ($323 million) between Sound Global’s bank and book cash balances as of Dec. 31 while working on its 2014 earnings, according to a company statement Wednesday. Standard & Poor’s predicted in a report issued Thursday that there’s a 50 percent chance of default on the company’s dollar bonds before October.

The Beijing-based company’s $150 million of 11.875 percent 2017 securities plunged 14.8 cents on the dollar to 70 cents as of 1:15 p.m. in New York, according to prices compiled by Bloomberg. The notes have slid from this year’s high of 107.8 cents in February.

Global investors are scrutinizing Chinese companies, the world’s biggest corporate debtors, amid the slowest economic growth since 1990 and President Xi Jinping’s crackdown on corruption. Kaisa Group Holdings Ltd. became the first Chinese developer to default on dollar bonds earlier this month. Sound Global was accused of accounting irregularities by Emerson Analytics Co., an independent research group, in February.

Cash Squeeze

“We have been very negative on the company after the alleged accounting irregularities, compounded by the resignation of the chairman of the audit committee post the audit issue,” wrote Trung Nguyen, a credit analyst at Lucror Analytics, a Singapore-based independent credit researcher.

The wastewater treatment company could face a cash squeeze if it breaches covenants on its $150 million of dollar bonds and triggers a default, S&P analysts led by Gloria Lu wrote in their report. That’s likely to happen in June, when Sound Global is scheduled to report audited 2014 annual results.

“In our view, at least a quarter of bondholders -- the minimum required under the terms -- may demand immediate payment” if a default occurs, the analysts wrote.

S&P downgraded the debt three steps to CCC, eight levels below investment grade. Sound Global also has a $110 million syndicated bank loan, which would also be at risk of accelerated payment, S&P said.

Covenants

Sound Global said on March 31 that independent non-executive director Wong See Meng, who was also the chairman of the audit committee, had resigned on March 26. The auditors reported their findings to Singapore’s Ministry of Finance, Sound Global said in the statement Wednesday.

Assuming the auditors will resume work after the final report is issued, Sound Global expects to publish 2014 earnings in late June, according to the statement.

Sound Global will have violated the “provision of financial statements and reports” covenant on its 2017 notes if it doesn’t file the annual results by Thursday, according to Wen Haifei, an investor relations official at the company.

If bondholders with over 25 percent of the securities issue a written notice to the bond trustee after Thursday, the company will have 30 days from that point to cure the covenant breach to avoid a technical default. At present, less than 25 percent of bondholders want to issue a notice, Wen said.

The Hong Kong-listed company’s independent review committee will hire a professional corporate-investigation firm early next week to look into the matter, probably returning a final report by late May, according to the Wednesday statement.

The company’s shares, which were suspended in March, will remain so until further notice, it said.

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