China Steelmaker Default Risks Flag Debt Woes at State Firms

  • Bloomberg model shows Xining Special default risk at 5.7%
  • Firm says it's looking for support from local governments

A Chinese government-backed steelmaker faces the highest default risk among the nation’s listed companies with bonds due in the next year, according to the Bloomberg Default Risk model, amid mounting signs of stress at state firms.

Xining Special Steel Co., whose products are used in the rail, automobile and energy industries, has a 5.7 percent probability of missing debt payments in the next 12 months, the highest among 420 listed Chinese issuers with note payments due in the coming year, according to the Bloomberg Default Risk model. That compares with an average 1.2 percent probability for all the firms. The model tracks metrics including share performance, debt and cash flow.

Three Chinese state-owned enterprises have reneged on bond obligations this year, compared with only one in the same period of 2015. Dongbei Special Steel Group Co. defaulted on bonds three times in the past month. Baoding Tianwei Group Co. on April 21 missed debt payments for a third time. Xining Special Steel has securities maturing in June.

“The market no longer believes SOE giants with high debt ratios and big losses are too big to fail,” said Shi Lei, the head of fixed-income research at Ping An Securities Co., referring to state firms in general. “The recent defaults have completely changed Chinese investors’ views on credit risks.”

Xining Special Steel, based in the northwestern province of Qinghai, said in e-mailed comments on April 22 in response to Bloomberg questions that it has been seeking to sell private-placement bonds and looking for support from local governments and financial institutions in the province for the debt repayment in June. It said the parent, Xining Special Steel Group, provides a guarantee for the company’s bonds and will fulfill its responsibility, without specifying which securities.

The manufacturer said in January it planned to sell 5.2 billion yuan ($801.2 million) of shares in a private placement within six months after the company gets regulatory approval. The China Securities Regulatory Commission approved the sale on March 30.

“If the company can’t complete the share sale by June, it will face huge liquidity pressure,” said Sun Binbin, a bond analyst at China Merchants Securities Co. in Shanghai. “If it can complete the share sale, the sale will give some support to the repayment in June.”

Investors have an option to sell 1 billion yuan of eight-year notes back to Xining Special Steel on June 15, according to Bloomberg-compiled data. The notes maturing in 2019 were sold in 2011 with a coupon rate of 5.75 percent.

The steelmaker also has 500 million yuan of securities maturing on June 13, Bloomberg-compiled data show. The two-year notes, which were sold in a private placement in June 2014, have a 8.8 percent coupon.

The company had a loss of as much as 1.95 billion yuan in 2015, compared with profit of 41.58 million yuan in 2014, according to preliminary figures released on Jan. 30.

— With assistance by Yuling Yang, and Judy Chen

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