China’s Latest Bond Scare Burns Holdouts as Defaults Spread

  • Hidili has said it can't pay $190.6 million due Wednesday
  • Schroder Investment sees `cold coal winter' for investors

The commodities slump is set to claim another bond-market casualty as a Chinese coal miner stumbles under its debt load, adding to global defaults at a six-year high.

Hidili Industry International Development Ltd. hasn’t paid $190.6 million of bond principal and interest due Wednesday, after failing to raise money from banks or asset sales, it said in a filing. Noteholders who shunned the miner’s buyback offer in September 2014 have seen the securities’ price slump by more than half.

China’s slowest growth since 1990 is crimping cash flows at miners, steelmakers and developers following defaults by Winsway Enterprises Holdings Ltd. and Kaisa Group Holdings Ltd. More pain may be in store, after record rating downgrades on the nation’s borrowers by Standard & Poor’s and Moody’s Investors Service this year.

“Hidili’s struggle could have a chain reaction in China’s real economy,” said Ji Weijie, a credit analyst in Beijing at China Securities Co. “Banks could see rising bad debts, and smaller companies counting on distressed companies like Hidili could also fail.”

Lost Opportunity

The coal miner, based in the southwestern province of Sichuan, sold $400 million of the 8.625 percent notes in 2010. It retired $196 million of the securities after making a partial buyback offer in September 2014 at 68 cents on the dollar with bank funding.

The 2015 notes have tumbled to a record low of 20.5 cents on the dollar as of 4:54 p.m. in Hong Kong, according to Bloomberg-compiled prices.

“It’s a cold coal winter for investors,” said Raymond Chia, the head of fixed-income research for Asia ex-Japan at Schroder Investment Management Ltd. in Singapore. “There was a chance atsome point in time to exit at higher prices, but now investors could potentially face severe losses.”

The company tried reducing its debt load as coal prices slumped 21 percent this year, but without success. At the same time, weakening creditworthiness has made it harder to refinance in the global debt capital markets and with domestic banks.

Loan Default

Hidili reported losses the first six months of this year, and in the preceding three years. Cash dwindled to 118 million yuan ($18.6 million) as of June 30, from 793 million yuan two years earlier. Total debt stood at 7.1 billion yuan versus 8.5 billion yuan over that period.

The miner failed to repay a 289.6 million yuan loan which fell due in June, and is seeking a waiver on covenants and an extension. Its onshore loans totaled 6 billion yuan as of June 30, according to an Oct. 30 filing.

“We have been trying to sell assets and get new bank loans to repay notes,” Frank Sheng, head of investor relations, said on Nov. 3. “But in the past two months, the financing situation for coal companies has worsened in China and we haven’t been able to sell assets. In the short term, we don’t think the coal prices will rebound.”

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