* Huatong Road & Bridge Group warns of default after head
exec put under investigation
* Would be first default on primary bond market, first
default on bond principal in China
* Political problem creates short-term liquidity problem for
* Company highly exposed to accounts receivable from local
govt projects - analysts
* Analysts see little wider market impact
(Adds background, company declining comment, analyst
statements, balance sheet data)
By Pete Sweeney
SHANGHAI, July 17 A little-known construction
firm is at risk of becoming the first borrower to default in
China's largest bond market, highlighting how Beijing's
anti-corruption drive could aggravate financial pressure on the
struggling real estate sector.
Huatong Road & Bridge Group Co Ltd said on Wednesday it was
uncertain whether it would be able to pay interest or principal
on an 400 million yuan ($64.48 million) one-year bond set to
mature on July 23, which it blamed on an ongoing official
investigation into its chief executive.
That would be the first time China's interbank bond market -
the primary platform for China's institutional fixed income
investors, hosting 94 percent of the country's bond issues - has
seen a public default, and the first time a Chinese company has
openly defaulted on both interest and principal for a bond.
Huatong's chief executive Wang Guorui was publicly dismissed
from Shanxi province's Chinese People's Political Consultative
Conference (CPPCC), a political advisory body, on July 10 on
suspicion he had broken the law, according to a statement on the
provincial government's website.
The provincial government did not give further details.
Huatong's statement to the official Shanghai Clearing House had
been similarly short on details, stating only that Wang was
"assisting an official investigation".
The company declined to comment when contacted by Reuters.
In China, the detention of a chief executive, who typically
monopolizes much decision-making power, can effectively paralyse
a company if the investigation prevents the executive from using
his "chop" to sign off on payments.
Worse, lenders and suppliers are also inclined to minimize
exposure to companies suffering legal problems, which can cause
short-term credit to dry up, said Ivan Chung, senior vice
president for Greater China Credit at Moody's in Hong Kong.
"Typically when the CEO has trouble, banks will stop issuing
short-term credit lines. The company will also no longer be able
to get credit from suppliers."
HOOKED ON SHORT-TERM CREDIT
Unfortunately, Huatong and similar firms in construction and
real estate have grown increasingly dependent on short-term
credit to stay afloat, as China's housing market continues to
soften and revenues from new projects have stagnated.
Huatong's most recent financial statement, posted on the
Shanghai Clearing House website, shows the firm had nearly 8
billion yuan in liquid assets on hand at the end of the first
quarter, but nearly half of that was from accounts receivable
and other yet-to-be received sources of funds presumed to be
Analysts doubted how soon Huatong would actually see that
money, given that many of those invoices were for projects built
on behalf of local governments that are now postponing payments
as their own balance sheets come under pressure.
"Private companies are increasingly facing political risk,"
said one market insider who spoke on condition of anonymity.
"It's quite freakish."
The Huatong bond, for example, had a
tenor of only one year, with a coupon rate of 7.3 percent.
Official data in June showed that lending and off-balance
sheet products surged in June, but the surge was driven by
increases in short-term loans and shadow banking products, after
medium- and long-term loans declined in May.
"The pick-up was led primarily by short-term loans and
bills, raising concerns about the use of the funds, the
potential to support growth and the extent of the recovery,"
wrote Jian Chang and Serena Zhou of Barclays in a research note
published on Wednesday.
Many Chinese companies have been backing off from bond
issuance plans ever since Beijing allowed the country's first
public bond default to occur in March, when a near-bankrupt
private solar power company failed to make payments on interest
due on a bond trading on the Shenzhen exchange, a smaller venue
serving retail investors.
A Reuters analysis of company filings on the China Foreign
Exchange Trade System website showed that more than 30 companies
filed to cancel their bond issuance plans in the second quarter.
At the same time bond yields on differently rated
instruments have diverged as investors have grown more conscious
of risk, in particular from privately held companies not
considered to be operating under an implicit government bailout
However, bond market traders and analysts did not perceive
the Huatong default, if it occurs, as surprising or posing a
wider risk to market sentiment in general.
"We do not expect the incident to have significant impact on
the overall bond market," wrote analysts from Guoxin Securities
in a research note.
"On the one hand, the key reason for the default is
political ... on the other hand, this company is private, and so
its risk-based pricing has always been higher than state-owned
($1 = 6.2032 Chinese Yuan)
(Reporting by Pete Sweeney, Xu Yong and the Shanghai Newsroom;
Editing by Richard Borsuk, Mark Bendeich and Alex Richardson)