China bond default risk prompts others to delay fund raising

SHANGHAI, March 7 Thu Mar 6, 2014 6:58pm EST

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SHANGHAI, March 7 (Reuters) - The threat of China's first domestic bond default has prompted Suining Chuanzhong Economic Technology Development to delay a one billion yuan ($164 million) debt issue and two other companies have halted deals blaming market volatility.

The postponements were announced after loss-making Chinese solar equipment maker Shanghai Chaori Solar Energy Science and Technology Co Ltd warned it could not meet bond interest payments due on Friday.

The payment failure would represent the first domestic bond default in a country with record levels of corporate debt that many analysts had expected to trigger defaults this year.

The run-up in corporate debt since 2008, and overcapacity in sectors such as steel, coal and solar energy, have threatened the solvency of many borrowers.

Chuanzhong said late on Wednesday that the news that Chaori Solar was set to miss a coupon payment on Friday "triggered severe upheaval in the bond market", so it had delayed its bond deal.

Taizhou Kouan Shipbuilding postponed a 300 million yuan issue of short-term commercial paper, while Xining Special Steel cancelled a 470 million yuan offering of medium-term notes, the companies said.

The deals are relatively small, but the delays underline the risk that an unprecedented default will make it harder for other companies to access capital.

Chuanzhong originally planned to launch the offer on Thursday and take orders until March 14. The seven-year fixed-rate bond was priced to yield 8.3 percent, equal to a spread of 3.3 percent over the current one-year Shanghai Interbank Offered Rate (SHIBOR) rate.

Pengyuan, a Chinese rating agency, has rated the bond AA and the issuer AA minus. AA is relatively weak by the standards of the Chinese market.

Yields on corporate and enterprise bonds pushed higher after Chaori Solar's announcement. Five-year AA rated notes rose 8 basis points to 7.77 percent, the biggest increase since November 15, ChinaBond data showed.

Chaori said earlier this week it could pay only 4 million yuan of the 89.8 million yuan in interest due on the bond.

The shortfall in payment was due to a liquidity crisis the company has not resolved, Chaori said. It had failed to secure enough funds from external sources to cover the loss, it said.

The five-year corporate bond was issued on March 7, 2012 with a fixed coupon of 8.98 percent through China Securities. The issuer and the bond received AA ratings from Pengyuan. On May 18, 2013, Pengyuan downgraded the ratings to CCC.

Barclays analysts said the default would have a limited impact on markets.

"We judge the systemic risk to the overall bond and financial markets from this potential default to be small," they said in a client note.

"The likelihood of a credit or a financial crisis, and its overall macro and growth impact, is also small for now."

Chaori narrowly avoided a bond default in January 2013 after a local Shanghai government persuaded banks to defer claims for overdue loans so the company could meet interest payments.

China's solar energy industry has suffered from severe over-capacity and falling prices for photovoltaic cells, while the government has been embroiled in a trade war with the United States and the European Union

Chaori last week reported a net loss of 1.33 billion yuan for 2013, less than its loss of 1.68 billion yuan in 2012. But the operating income fell by 60 percent in 2013.

Standard & Poor's estimated outstanding bank loans and bond debt among non-financial companies in China reached about $12 trillion at the end of 2013, the equivalent of more than 120 percent of GDP. (Reporting by Fiona Lau of IFR in HONG KONG: Additional reporting by Gabriel Wildau in SHANGHAI; Writing by Neil Fullick in SINGAPORE; Editing by Raju Gopalakrishnan)

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