Shanshui Default Woes Hit China as More Bond Sales Scrapped

Updated on
  • 43 Chinese companies scrapped 46.7 billion yuan of bond sales
  • About 65 percent of the issuers are rated AA or lower

The default by China Shanshui Cement Group Ltd. is forcing more Chinese companies to scrap bond sales as yields surge.

About 43 companies have canceled or delayed 46.7 billion yuan ($7.3 billion) of notes since the cement maker issued a default warning on Nov. 5 before missing the payment, according to statements to Shanghai Clearing House and Chinamoney. In the 10 trading days after Baoding Tianwei Yingli New Energy Resources Co. defaulted last month, only nine companies scrapped a total of 8.8 billion yuan of bond issuance.

“Investors didn’t expect Shanshui’s default because it appeared that its cash flow was still OK,” said Sun Binbin, a bond analyst at China Merchants Securities Co. in Shanghai. “The default is having a bigger impact on the market than previous defaults this year.”

More Chinese companies are struggling to repay debt amid the worst economic slowdown in a quarter century. Shanshui was at least the sixth firm to default in the local corporate bond market this year. Hua Chuang Securities Co. estimated the total amount of new debt being used to cover interest will be a record this year at 7.6 trillion yuan, up 5 percent from last year.

The yield premium on Chinese five-year AA- rated corporate bonds over government notes has widened 11.6 basis points in November, set for the worst month since June, according to Chinabond data.

‘Very Concerned’

Among the 43 issuers that canceled sales, about 65 percent are rated AA or lower, according to data compiled by Bloomberg. Thirteen issuers are in the coal, steel or cement industry.

“The number of defaults has increased to an extent to reverse the market expectation about credit risks,” said Li Ning, general manager of the fixed income department at Western Securities Co. in Beijing. “Investors are very concerned about credit risks. They are all dumping coal, steel, cement and new energy bonds. We will see more scrapped sales.”

Sinosteel Co., a Beijing-based steel trader, changed a bond payment deadline again this month. It also delayed an interest payment due Oct. 20, which constituted a default, according to Industrial Securities Co., Haitong Securities Co. and China Merchants Securities at the time.

Coal trader Winsway Enterprises Holdings Ltd. failed to pay interest on dollar notes for a second time this year in October, while Hidili Industry International Development Ltd. didn’t repay securities due Nov. 4.

State-owned coal miner Yunnan Coal Chemical Industry Group Co. and its businesses had 1.31 billion yuan of overdue loans as of Oct. 30 due to rising borrowings and a cash shortage, its unit Yunnan Yunwei Co. said in a statement to the Shanghai stock exchange.

— With assistance by Laura Yin, Yuling Yang, and Judy Chen

(Updates yield premium in fifth paragraph.)
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