* 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 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
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
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
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
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
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
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
($1 = 6.2078 yuan)
(Additional reporting by Umesh Desai in Hong Kong; Editing by