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China's next bond default looms as polyester firm declares bankruptcy
April 8, 2014 / 10:06 AM / in 4 years

China's next bond default looms as polyester firm declares bankruptcy

* Polyester firm in Zhejiang declares bankruptcy

* Coupon payment on $9.7 mln in bonds due in July

* String of recent defaults highlights rising credit risk

* More defaults expected as economy slows

By Yong Xu and Gabriel Wildau

SHANGHAI, April 8 (Reuters) - A small manufacturer of polyester yarn based in China’s wealthy Zhejiang province has declared bankruptcy, threatening its ability to meet an interest payment on a high-yield bond due in July.

Zhejiang Huatesi Polymer Technical Co Ltd asked a local court for bankruptcy protection in early March, according to an announcement on the website of the Anji County People’s Court.

The firm sold 60 million yuan ($9.7 million) in bonds in a private placement in January 2013 at an interest rate of 11 percent. The next interest payment is due on July 23, while the bond matures in January next year.

A string of credit defaults in recent weeks has highlighted rising credit risks in China, partly fuelled by signs that the economy is slowing down.

China’s domestic bond market experienced its first-ever default early last month when Shanghai Chaori Solar Energy Science and Technology Co Ltd missed an interest payment. That bond carried no guarantee, and it remains unclear if investors will be repaid.

A technical default late last month by a small construction materials firm, Xuzhou Zhongsen Tonghao New Board Co Ltd, was the first in China’s high-yield bond market.. The guarantor of that bond eventually agreed to fund the required interest payment.

Chaori’s default was seen as a landmark for Chinese markets, turning on its head a long-held assumption that even high-yielding debt carried an implicit state guarantee.

Reflecting the government’s new attitude towards default, the China Securities Regulatory Commission (CSRC) described the Xuzhou Zhongsen default as a commonplace event.

“(The Xuzhou Zhongsen bond) was issued to investors according to regulations, and the default is an isolated risk event. The commission will abide by market-based principles and handle the case according to law,” CSRC spokesman Deng Ge said at the agency’s weekly press conference on Friday.

MORE EXPECTED

Analysts widely expect more defaults on loans, bonds, and shadow bank products this year. Semiconductor, software, and commodities firms are among the most at risk for default, a Reuters analysis of more than 2,600 Chinese companies showed.

The Xuzhou Zhongsen default marked the first ever in China’s high-yield bond market, which the securities regulator launched in June 2012 in a bid to offer a new financing channel for small, private firms. Such firms often struggle to access credit in China’s state-dominated financial system. Zhejiang Huatesi’s bond was also issued in that market.

Pengyuan Credit Rating Co Ltd gave Zhejiang Huatesi Polymer’s bond an A+ rating when it was issued. That is among the lowest ratings at which bonds are commonly sold in China’s market.

An executive at Dongguan Securities Co Ltd, which served as underwriter on the bond, told Reuters on Tuesday that the guarantor on the bond is likely to meet its obligation to make interest and principal payments if the issuer is unable to do so.

The bond carries an unconditional guarantee by Tianlong Holding Group Co Ltd, another polyester firm in Zhejiang. It is also secured by land rights owned by the company and personal assets owned by the controlling shareholder, the underwriter said.

“There are various different reasons (for Zhejiang Huatesi’s problems). Factors affecting that sector, the influence of industrial restructuring, etc,” the executive said.

Based on bids submitted on Tuesday afternoon, the bond was yielding 12.3 percent.

The phone number on Zhejiang Huatesi’s website has been disconnected, according to an automated message.

Tianlong Holding did not immediately answer calls seeking comment on Tuesday afternoon.

$1 = 6.2123 Chinese Yuan Editing by Chris Gallagher

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