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UPDATE 2-China construction firm warns of possible landmark bond default
July 16, 2014 / 11:37 AM / 3 years ago

UPDATE 2-China construction firm warns of possible landmark bond default

(Recasts, lifting context and background)

SHANGHAI, July 16 (Reuters) - A Chinese builder has warned its investors it may not be able to repay a $65 million debt due next week, possibly becoming the first borrower to default in the country’s largest bond market and highlighting concerns over the construction sector.

Huatong Road & Bridge Group Co Ltd said on Wednesday it might fail to pay investors both interest and principal due on a one-year bill on July 23, revealing that its chairman was “assisting an official investigation.”

The firm gave no details on the investigation in its statement to the official Shanghai Clearing House. Both the construction and real estate industries have suffered as house prices have fallen and infrastructure spending has slowed.

If Huatong fails to pay, it would be the first publicly announced default in China’s institutional bond market. It would also be the first time a Chinese company has publicly defaulted on both interest and principal due on a bond.

China’s first publicly-known default was in March when Shanghai Chaori Solar Energy Science and Technology did not make 89 million yuan ($14.35 million) in interest payments due on a bond traded on the Shenzhen exchange, a far smaller venue serving retail investors.

But that default startled many would-be bond issuers who put plans on hold as yields on riskier debt rose in reaction. At the same time, bond investors began moving funds into bonds perceived as protected by implicit government guarantees.

Chinese companies owe their current bondholders just over $1 trillion, of which 15.8 percent is coming due this year, Thomson Reuters data showed.

Huatong, based in the north central province of Shanxi, issued 400 million yuan ($64.48 million) in one-year bills in July last year. According to Reuters data, the company had total assets of 11.1 billion yuan at the end of 2013.

The bond has a coupon rate of 7.3 percent. The issue was led by China Guangfa Bank and Guotai Junan Securities.

After Huatong’s statement, China Lianhe Credit Rating downgraded the company to BB+ from AA- with a negative bias, and the bond’s rating to B from A-1.

Credit metrics for many Chinese firms have been steadily worsening, in particular those exposed to real estate. While China posted post 7.5 percent GDP growth in the second quarter, many economists attributed that primarily to government support as opposed to a genuine revival in end demand. ($1 = 6.2035 Chinese Yuan) (Reporting by Pete Sweeney, Xu Yong and the Shanghai Newsroom; Editing by Richard Borsuk and Mark Bendeich)

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