Tuesday, April 1, 2014

China's Xuzhou Zhongsen Missed Bond Coupon Payment, Paper Says

A privately held Chinese building materials company failed to pay interest on high-yield bonds, 21st Century Business Herald reported today.

Xuzhou Zhongsen Tonghao New Board Co., based in the eastern province of Jiangsu, missed the 10 percent Printable Coupons payment due March 28 on the notes, which it sold 180 million yuan ($29 million) of last year in a private placement, the report said, citing an unidentified person. The bond's guarantor, Sino-Capital Guaranty Trust, refused to pay on behalf of the company, according to the Guangzhou-based financial newspaper.

The default would mark the second for China's onshore bond market, following one by Shanghai Chaori Solar Energy Science & Technology Co. (002506) last month. Increasing defaults may signal the government has backed off from its practice of bailing out companies with bad debt. Premier Li Keqiang said in March at the conclusion of an annual legislative gathering that some defaults may be unavoidable as authorities tighten credit.

"In general, what we will see is a gradual unwinding of implicit government guarantee for a lot of credit products in China," said James Zhao, chief investment officer in Beijing at the international department of CCB Principal Asset Management Co. "There will continue to be a mixture of bond defaults and too-big-to-fail, or too-entangled, cases. It's now up to the market to find the pattern and investors will now have to figure out who is creditworthy and who is more likely to fail. It's a positive development."

Failures Mount

A woman who answered the phone at Zhongsen Tonghao and wouldn't give her name said the company couldn't immediately comment on the matter. Two calls to Sino-Capital Guaranty Trust went unanswered.

The number of Chinese companies whose debt is double their equity has surged since the global financial crisis, suggesting more defaults may come. Publicly traded non-financial corporates with debt-to-equity ratios exceeding 200 percent have jumped 57 percent since 2007. Chaori Solar may become China 's own "Bear Stearns moment," prompting investors to reassess credit risks as they did after the U.S. securities firm was rescued in 2008, according to Bank of America Corp.

Another closely held company based in neighboring Zhejiang province, property developer Zhejiang Xingrun Real Estate Co., collapsed less than two weeks after the Shanghai Chaori default.

Reluctance to bail out companies that can't repay debt signals "regulators' higher tolerance for corporate bond defaults amid financial market reforms, which is in line with the current central administration's shift to adopt more market-oriented policies," Moody's Investors Service said in a report on March 7.

To contact Bloomberg News staff for this story: David Yong in Singapore at dyong@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net; Katrina Nicholas at knicholas2@bloomberg.net Gregory Turk, Andrew Monahan

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