UPDATE 1-Yields spike on Chinese construction firm's bond as default looms
* Local govt financial officials deny support for company
* Huatong Road official says default can be averted
* Firm could be first to default in China's interbank market (Adds company, government and other comment)
By Pete Sweeney
SHANGHAI, July 22 (Reuters) - Yields on a short-term bond issued by a troubled Chinese construction company have more than doubled in recent days as hope fades that the firm can avoid defaulting on Wednesday.
On July 16, unlisted Huatong Road & Bridge Group Co Ltd announced that it was uncertain about its ability to make payment on a 400 million yuan ($64.4 million) one-year bond issue that matures July 23, after its chief executive was placed under investigation for illegal behaviour.
Huatong has not made a public announcement since July 16, but a company official told Reuters on Tuesday that there is still time for the company to make deposits and avert default.
One day after Huatong's July 16 announcement, the yield on its bond spiked to a record high of nearly 15 percent, from around 6 percent, and has remained in the neighborhood since then.
The way the spike was contained and Huatong's bonds haven't been trading at significant discount levels might be explained by a belief there will be payment on the bond, with a delay.
"The fundamentals of the company are okay, it's just a matter of liquidity," said a fixed income dealer in Hong Kong who does not trade the bond but watches the China onshore market. "So even though payment will be late, you will get paid in full."
A report in the official Shanghai Securities News on Friday quoted an Huatong official as saying the company expected strong government support in helping it recover receivables and postpone loan payments. But that does not appear to have restored market confidence.
Officials from the finance departments of both the Yangquan municipality and Shanxi province, where Huatong is based, said they had received no instructions to support Huatong.
However, Wang Wenlin of the Yangquan municipal finance office said that while her bureau had received no instructions, she could not rule out that other goverment institutions may be planning some form of support independently.
A bond trader at a major state-owned bank in Shanghai said the spike in yield "indicates bondholders are not confident the company will be able to pay on Wednesday."
HARD TO PREDICT
"It is hard to predict whether the government will come to bail out. In the future, investors will be more cautious about bonds with lower ratings," said the trader, who spoke on condition of anonymity because she is not authorised to speak to the media.
Li Jing, an official at the National Association of Financial Market Institutional Investors, a government-supported industry association involved in bond market regulation, told Reuters that both the company and its underwriters were working diligently to resolve the issue, but did not say any bailout or government rescuen was under way.
"Our association has communicated with Huatong but didn't get a clear reply," she said. "The company is trying its best to avoid default. Everyone is working on this issue, it could change at the last minute. We cannot make any conclusions right now."
If Huatong doesn't pay on Wednesday, it will be the first time a Chinese company has defaulted on a bond principal payment, and the first bond default in China's interbank market, which hosts around 94 percent of China's bond issues.
Huatong's problem, analysts said, is not limited to the legal issues with its chief executive, but also its high level of unpaid receivables, many of them from projects it engaged in on behalf of local governments, which have delayed payment.
However, the 21st Century Business Herald, a major Chinese business newspaper, in a report quoting unnamed sources saying that the government of Yangquan city where Huatong is based is only able to pay back 50 million yuan, far short of what Huatong needs to avoid default.
CASH ON HAND, IN MARCH
Huatong's latest financial statement, for the end of March, showed adequate cash on hand to make the payment, but it also showed a high-level of short-term debt coming due.
China's first-ever public bond default occurred in March when a small solar power company defaulted on an interest payment due on a bond traded in Shenzhen, a far smaller retail market compared to the interbank market where participation is limited to institutions.
The default of Shanghai Chaori Solar Energy Science and Technology Co Ltd saw bond yields rise for private issuers in the aftermath, and set off a cascade of cancelled issuance plans.
But it also appears to have provoked an investor flight to the safety of local government investment vehicle bonds. These are high yielding but also considered subject to an implicit bailout guarantee.
The bond market reaction has been selective so far, and analysts do not expect to feel an impact across the board from a default, should it happen.
Domestic yields on lower quality issuers and on short-term debt were already rising prior to Huatong's announcement, in particular on companies heavily exposed to China's struggling property sector where average prices in most markets continue to slide.
($1 = 6.2078 yuan) (Additional reporting by Umesh Desai in Hong Kong; Editing by Richard Borsuk)