* Chaori Solar will make interest payment on time -chairman
* Zero-tolerance policy for default continues
* Local govt persuades banks to forebear on overdue loans
* Moral hazard hampers China's bond market development
By Gabriel Wildau and Sharon Xu
SHANGHAI, Jan 23 A Chinese solar firm which
nearly produced the country's first domestic bond default will
complete an interest payment on schedule after a local
government intervened on its behalf.
Investors say the latest instance of a government riding to
the rescue of a troubled Chinese firm has led to moral hazard
and inefficient credit allocation.
The government of Shanghai's Fengxian district persuaded
Shanghai Chaori Solar Energy Science and Technology Co.'s
banks to defer claims for overdue loans worth 380
million yuan ($61 million), the company's chairman, Ni Kailu,
told creditors at a meeting on Wednesday.
Ni said that the deferral period of three to six months will
enable the company to use its own cash to make a 90 million yuan
interest payment due on March 11.
In previous near-defaults, local governments had stepped in
directly to arrange bailout funding. But as in past cases, the
deal flouts legal notions of debt seniority by allowing one
group of creditors - bondholders - to get paid in full, even as
a pre-existing default remains un-cured.
Agricultural Bank of China is Chaori's
largest creditor bank, Ni said, with overdue loans worth 270
A spokesman with the Fengxian district government, who
declined to give her name, said she wasn't aware of negotiations
with Chaori involving the government. AgBank couldn't be reached
Chinese bond issuance has exploded in recent years and is an
increasingly attractive alternative to bank loans for Chinese
firms. But analysts say the market does not effectively price in
risk because investors assume the government will never allow a
This assumption appears well-founded. In April 2012, a local
government in Shandong province stepped in to prevent a bond
default by a state-owned textile company, Shandong Helon
In July, a local government in Jiangxi province announced it
would use taxpayer funds to repay the trust loans of LDK Solar
, a U.S.-listed solar equipment manufacturer.
Many market watchers had believed that the government would
allow Chaori Solar to serve as a long-awaited lesson in credit
risk and a test of the country's little-used bankruptcy laws.
Unlike Helon, Chaori was not state-owned, nor was it a
leader in its sector. Its location in prosperous Shanghai also
meant that it was not viewed as integral to the local economy.
"It seemed like it could be a perfect test case for the
first default," said a Chinese bond trader at a European bank in
China's solar industry has been battered over the last year
by severe overcapacity in photovoltaic cell manufacturing, the
cut-off of solar subsidies in major European markets, and trade
complaints filed by both the EU and U.S.
Last week Chaori warned of a net loss for 2012 of up to 1.1
billion yuan, following a loss in 2011. Two straight years of
net losses would put the company at risk of de-listing.
Fears over its finances ratcheted up after the company's
shares were suspended on Dec. 20.
Ni traveled to the U.S. and Italy in late December,
prompting rumours that he had absconded with company funds. He
returned early this month, but a few days later the company's
credit rating was downgraded from AA to AA-.
($1 = 6.2198 Chinese yuan)
(Additional reporting by Chen Yixin; Editing by Kim Coghill and