SHANGHAI, March 7 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
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
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)