* Huatong Road & Bridge has said might default on loan principal after CEO detained
* Local govt helping Huatong collect account receivables - state media
* Would be 1st default in China interbank market and 1st on bond principal
* Media reports say banks encouraged not to press for loan repayment
By Pete Sweeney
SHANGHAI, July 18 (Reuters) - A Chinese construction company at risk of declaring a landmark bond default on nearly $65 million is getting local political support to hold off creditors and get cash, state media reported on Friday, citing sources at the struggling firm.
Huatong Road & Bridge Group Co Ltd announced on Wednesday it was uncertain about its ability to pay principal on a 400 million yuan one-year bond maturing on July 23. The company blamed an official investigation into allegations of illegal activity by its chief executive.
If Huatong defaults, it would be the first public one on China's interbank bond market - the primary platform for China's institutional fixed income investors, hosting 94 percent of the country's bond issues. It would also be the first time a Chinese company has openly defaulted on principal for a bond.
However, so far Chinese bond markets have remained relatively unaffected by the news, with analysts saying the possible default did not come as a surprise and seemed more a company-specific problem, although yields for one-year AA-rated commercial paper have been rising since June given tightness in the interbank market.
Analysts told Reuters that Huatong's account receivables and other receivables, which amounted to more than 3.5 billion yuan ($563.8 million) in the first quarter, are a major headache for the company.
The official Shanghai Securities News quoted Geng Naizhung, who it described as a Huatong official, as saying the "local government" where the company is based is coordinating with the firm to facilitate collection of its outstanding bills.
Geng also said the authorities held a meeting at which they "suggested" that banks cannot force Huatong to pay off outstanding loans, according to the report.
The report did not specify which local government body - Shanxi province or Yangchuan city, where Huatong is headquartered - Geng was referring to.
The Shanghai Securities News also quoted Geng as saying the company has dispatched working teams to collect accounts receivable and is seeking more support from local governments.
A financial newspaper, the 21st Century Business Herald, reported that the Yangquan municipal government and Shanxi provincial government held a meeting to try to ensure Huatong can repay its the one-year bond on time, quoting an unnamed "insider" it said was connected to the company.
LEVERAGING GOVERNMENT SUPPORT?
The Business Herald reported that the person said Huatong would be able to leverage government support from higher levels to encourage local governments who still owe the firm money to pay up.
Calls to Huatong on Friday were not answered.
The finance department of the Shanxi provincial government, when contacted by Reuters, said the department was aware of the situation at Huatong but said it had not given any information to the media, and said no senior officials from the department had given any instructions regarding the bond issue.
Forcing banks with outstanding loans to defer repayment in order to facilitate repayment of interest and principal has been a common practice by local governments in China, who tend to have strong influence over local bank branches.
Huatong has 2.7 billion yuan in deposits and cash at hand, balanced against 1.8 billion yuan in short-term loans and another 554 million yuan worth of debt maturing within one year.
Many Chinese companies in the real estate sector have exposure to political risk, analysts say, because so many of their outstanding invoices are due from local government bodies that hired them for real estate projects - while many of those official bodies are themselves heavily debt and have postponed payment as Chinese property prices soften.
Christopher Lee, managing director of corporate ratings at Standard & Poor's, said cash flows of Chinese builders "have been affected by slower payments by real estate developers as property sales have been weak since early this year, and mortgage funding has been affected by tight credit conditions."
"Builders that are exposed to large infrastructure projects sponsored by local and regional governments also face slower payments," Lee said.
Friday's report in the 21st Century Business Herald said that a deputy manager has been placed in charge at Huatong in the absence of its chairman Wang Guorui.
Last week, Wang was dismissed from Shanxi province's Chinese People's Political Consultative Conference (CPPCC), a political advisory body, last week on suspicion he had broken the law. Analysts says that has made it difficult for Huatong to access short-term credit from banks and suppliers.
People knowledgeable about the situation told Reuters that lead underwriters of the bond, China Guangfa Bank and Guotai Junan Securities, have already sent groups to Huatong.
China Guangfa Bank publicly announced on Friday that it has sent a party to Huatong to supervise information disclosure and fulfill obligations of repaying the one-year bond. (Reporting by Pete Sweeney and the Shanghai Newsroom; Editing by Richard Borsuk)