China Erzhong Parent to Take Over Bonds Post Court Decision

  • Move means the notes should be paid, according to Moody's
  • Erzhong had faced speculation it may default on the notes

China National Erzhong Group Co. said its parent company plans to take over its bonds due 2017 after a local court accepted a restructuring request from one of its creditors, raising the chance investors will recover their principal.

The smelting equipment maker said Sichuan Deyang Intermediate People’s Court ruled to accept the request from First Design & Research Institute, according to a statement on Chinamoney’s website. The manufacturer’s controlling shareholder China National Machinery Industry Corp. plans to “take over” all the 1 billion yuan ($157 million) of 2017 notes to protect investors’ interests, according to a separate statement on Chinamoney’s website that didn’t elaborate.

The parent company’s move should prevent investors from suffering losses that may have been triggered by the court accepting the creditor’s request, according to Guotai Junan Securities Co. Baoding Tianwei Group Co. said last week it is filing for bankruptcy, five months after the maker of electrical transformers became the first state-owned Chinese company to default on its onshore debt.

“The endgame is the bonds will be paid,” said Ivan Chung, a senior vice president at Moody’s Investors Service in Hong Kong. “The outcome of Erzhong bond repayment is in contrast to Baoding Taiwei’s restructuring. Those are two extreme outcomes and they make it difficult for investors to assess the government’s intention to get rid of moral hazards.”

Previous Bailouts

The statement Tuesday didn’t specify how China National Machinery will “take over” the bonds. China National Erzhong sold the 1 billion yuan of 5.65 percent five-year securities in 2012.

Investors have been bailed out in debt crises before in China. Shanghai Chaori Solar Energy Science & Technology Co.’s investors didn’t lose a cent thanks to funds from a state-backed asset manager that stepped in several months after it became the first default in the onshore market in 2014.

China Bond Rating Co., a Beijing-based rating group, said China National Erzhong has technically defaulted on the bonds because it will miss the 56.5 million yuan of interest due Sept. 28, Beijing-based analysts Li Shulei and He Jiayi wrote in a report today.

The court also accepted a creditor’s request to restructure China Erzhong Group Deyang Heavy Industries Co., a subsidiary of China National Erzhong. China Erzhong Group Deyang has 310 million yuan of outstanding bonds due Oct. 14. China National Machinery Industry also plans to take over those bonds due next month, according to another statement on Chinamoney website.

The court move also means China Erzhong Group Deyang can’t repay the interest on those debentures, which would constitute a default, China Bond Rating said in the report.