* Chinese firm said to now have enough cash to pay off $64.5
* Efforts supported by local govt help to collect accounts
* Huatong's problems due to heavy exposure to govt real
* Chief executive under investigation for alleged illegal
* Analysts say last-minute default avoidance makes it hard
to price risk
(Adds background, analyst comment)
By Yong Xu and Pete Sweeney
SHANGHAI, July 23 A troubled Chinese
construction company avoided a landmark bond default at the last
minute on Wednesday, raising enough funds to pay off both
principal and interest on a 400 million yuan ($64.51 million)
bond, people directly involved in the matter told Reuters.
The people said there was aggressive fundraising by Huatong
Road & Bridge Group Co Ltd, as well as collection of its
accounts payable by a local government in Shanxi province, where
the firm is based.
The moves let Huatong steer away from what would have been
the first public default in China's massive interbank bond
market - where 94 percent of all Chinese bonds are issued.
No comment was immediately available from Huatong.
The people knowledgeable about the fundraising, who spoke on
condition of anonymity, said that while the money deposited in
an escrow account with Shanghai Clearing House would be
sufficient to pay off the bondholders, the company might not
make a formal announcement of the fact on Wednesday.
While Chinese bond issuers are obliged to publicly report
defaults, they are not required to announce an on-time
repayment, according to a Shanghai Clearing House official who
declined to give her name.
On July 16, Huatong warned investors it might not be able
to repay interest and principal due on a one-year bond
on Wednesday, saying that its chairman was
"assisting an official investigation".
MARKET NOT SURPRISED
Danny Chen, chief credit officer at China Lianhe Ratings,
which downgraded Huatong in response to that announcement, said
while he could not comment absent a fresh official announcement,
he expected the company to make some statement on Wednesday.
A bond trader at a commercial bank in Shanghai said news
that Huatong had obtained enough funds to avoid default "isn't
much of a surprise to the market".
"People had expected the local government and company to try
to avoid default given the impact," he said. "You may argue that
in the long run, one day such defaults will happen, but not for
Huatong chief executive Wang Guorui was publicly dismissed
from Shanxi province's Chinese People's Political Consultative
Conference (CPPCC), a political advisory body, on suspicion he
broke the law, according to a statement posted on the provincial
government's website on July 10.
If Huatong defaulted, it would have been the first time a
Chinese company defaulted on a bond principal in China.
Beijing saw its first public default in March, when Shanghai
Chaori Solar Energy Science and Technology Co Ltd
failed to make interest payments on a bond traded on the
Shenzhen stock exchange. Subsequently, many companies have gone
to the brink of defaulting only to see local governments spring
to provide support.
UNDERWRITERS SENT TEAMS
Huatong's fundraising effort was aided by the bond's primary
underwriters, China Guangfa Bank and Guotai Junan Securities,
which sent teams to Huatong to ensure information disclosure and
Bond analysts said that while yields on Huatong's bond last
week surged to nearly 15 percent from 6 percent, the market
priced in a delay in payment, not a permanent default, as
Huatong largely appeared to have short-term liquidity problems.
Huatong had previously told media it expected strong support
from the local government in rounding up overdue accounts
receivable and in delaying collection of outstanding loans
Analysts said many receivables involved other local
government bodies that had hired Huatong to build real estate
projects, then delayed payment due to their own financial
The analysts also said avoidance of a default is unlikely to
reassure China's fixed income markets, which have seen steadily
rising rates for short-term debt as demands from cash-strapped
companies for money continue.
"No market can sustain a status quo of no-defaults," a
trader at an Asian bank in Shanghai said. "Chinese authorities
will find one day that they cannot support all money-losing
($1 = 6.2010 Chinese Yuan)
(Additional reporting by Lu Jianxin and the Shanghai Newsroom;
Editing by Richard Borsuk)