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Mainland China's First Default Raises Specter Of China's Credit Bubble Collapse

Tyler Durden's picture




 

For the first time, a mainland Chinese company has defaulted on its bonds. SunTech Power Holdings has been clinging on by its teeth but after failing to repay $541mm of notes due on March 15th - and following four consecutive quarters of losses through the first quarter of 2012 and since then having failed to report quarterly earnings - owed to Chinese domestic lenders, the firm is restructuring. As Bloomberg reports, Chinese solar companies are struggling after taking on debt to expand supply, leading to a glut that forced down prices and squeezed profits - and most notably were unable to renegotiate its liabilities and obtain “additional flexibility” from creditors. This is highly unusual and perhaps is the beginning of a trend for Chinese firms. We already know the little discussed but gargantuan size of China's corporate bond market (which dwarves the US relative to GDP) as the mis-allocated credit tsunami of the last few years begins to hit its lending limit - just as Chinese corporate leverage is surging. If Suntech, the world’s largest solar-panel maker as recently as 2011, could not renegotiate its loans, we humbly suggest there are more problem firms out there about to find their friendly local banker a little less enthusiastic - just as Marc Faber warned recently.

 

STP's 168% rally of 'hope' all gone now...


 

Via Bloomberg,

Suntech Power Holdings Co. Ltd. (STP) became the first company from mainland China to default on its bonds after failing to repay $541 million of notes due March 15, breaching terms of other outstanding loans.

 

The move pushes what was once the world’s biggest solar panel maker into default on credit lines it has with International Finance Corp. and Chinese domestic lenders, Suntech said today in a statement from its headquarters in Wuxi. China Development Bank Corp (SDBZ). has loans to Suntech.

 

The move opens the way for Suntech noteholders to sue the company in the U.S., where its shares and bonds trade. Last week, Suntech obtained an agreement of holders of 63 percent of the notes to delay exercising their rights until May 15, allowing executives to press ahead with restructuring payments. Some noteholders not involved in those talks are organizing a rival group and have threatened to sue.

 

Suntech is seeking “a way forward that will take into account the rights and interests of all of its constituents, including shareholders, noteholders, lenders, customers, suppliers and employees,” Chief Executive Officer David King said in the statement. “We are currently exploring strategic alternatives with lenders and potential investors, which could help to set us on a path towards longer term success.”

 

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Mon, 03/18/2013 - 13:44 | 3343314 Abraxas
Abraxas's picture

Is this tremor in China going to cause a tsunami at the other end of the Pacific?

Mon, 03/18/2013 - 13:45 | 3343324 Irelevant
Irelevant's picture

If SHTF in China there will be no way to see the Tsunami as this webpage as many others will be taken over by the DHS and we moved to one of the comfortable forced labor camps where we can be reeducated.

Mon, 03/18/2013 - 13:47 | 3343336 cifo
cifo's picture

ZH should change the motto to "Where user comments are at least as smart as the posts."

Mon, 03/18/2013 - 13:59 | 3343384 DoChenRollingBearing
DoChenRollingBearing's picture

The whole Chinese debt problem (whether from companies or government or even state-owned companies) sets me to wonder:

 

How big are China's debt problems vs. the LARGE gold reserves they have been accumulating...?

Mon, 03/18/2013 - 14:06 | 3343415 Gromit
Gromit's picture

Greater by a factor of hundreds. Or thousands. Trillions versus billions.

 

Mon, 03/18/2013 - 18:54 | 3344860 viahj
viahj's picture

Leeeeeeoooooooo Koooooooooolivakis

Mon, 03/18/2013 - 14:22 | 3343494 Martial
Martial's picture

oooo oooo...I've been studying for this:

 

2+2=5

War is Peace.

Freedom is slavery.

Ignorance is strength.

 

Mon, 03/18/2013 - 13:45 | 3343326 fightthepower
Mon, 03/18/2013 - 13:46 | 3343329 King_of_simpletons
King_of_simpletons's picture

What matters for us here in this country is that the stock market will always keep going up, no matter what shit happens in other countries. That's the Fed guarantee.

Mon, 03/18/2013 - 13:49 | 3343345 LawsofPhysics
LawsofPhysics's picture

The "fed's guarantee" is only as good as those paper promises they keep printing.  

Mon, 03/18/2013 - 13:50 | 3343354 Dapper Dan
Dapper Dan's picture

But what if people here in the USa start selling their stocks enmass?

Mon, 03/18/2013 - 13:56 | 3343373 LawsofPhysics
LawsofPhysics's picture

LMFAO!!!  What percentage of people in the U.S. actually own stocks that they can sell?

Mon, 03/18/2013 - 14:07 | 3343421 Dapper Dan
Dapper Dan's picture

True!  but I do have a folding stock.

http://www.lawtactical.com/product_p/2012201.htm

Mon, 03/18/2013 - 14:36 | 3343467 LawsofPhysics
LawsofPhysics's picture

Many of us have several, so what?  Are you a veteran as well?  Have you ever had to use such tools? Get your tribe in order, all eCONomies are really local and will be even more so when all this central planning unwinds.

Mon, 03/18/2013 - 13:51 | 3343355 whatsinaname
whatsinaname's picture

Where is Leo K. ? Hope he is doing fine health wise even though some of his solar investments are now toast.

Mon, 03/18/2013 - 14:18 | 3343475 Freebird
Freebird's picture

Leo cut his losses & bought a Cypriot bank

Mon, 03/18/2013 - 14:30 | 3343536 Mine Is Bigger
Mine Is Bigger's picture

His name also came up in my mind when I read this article.  So, I googled.  He is apparently still doing fine.

His latest blog entry covers the Cypriot situation.

http://pensionpulse.blogspot.com

Mon, 03/18/2013 - 16:20 | 3344237 akak
akak's picture

I  hear Leo is having lunches with Cypriot pension fund managers lately.

(That is, in between his lengthy ass-kissings of Bernanke.)

Mon, 03/18/2013 - 21:38 | 3345425 Buck Johnson
Buck Johnson's picture

Sooner or later China will start selling it's US bonds to keep things afloat in the country.

Mon, 03/18/2013 - 13:46 | 3343330 The Invisible Foot
The Invisible Foot's picture

Failure is inevitable. WWIII is coming watch out.

Mon, 03/18/2013 - 14:35 | 3343578 Edward Fiatski
Edward Fiatski's picture

Death by a Thousand Cuts.

More of this coming for local entrepeneurs who dishonor their bond obligations - http://www.youtube.com/watch?v=X05ooFxdPkc

Mon, 03/18/2013 - 18:39 | 3344801 political_proxy
political_proxy's picture

Interesting perspective & reasonably presented that WWIII has already started:
http://www.fromthetrenchesworldreport.com/world-war-iii-breaking-out/38141/

Mon, 03/18/2013 - 13:47 | 3343337 maskone909
maskone909's picture

Weykom tuu shity-wok. Twy awww shity-chicken.

Mon, 03/18/2013 - 14:02 | 3343393 Manthong
Manthong's picture

..an de Shanghai Riva poke foo yung is deericious.

Mon, 03/18/2013 - 14:39 | 3343339 LawsofPhysics
LawsofPhysics's picture

There are no opposing views in China.  It is a centrally-planned, state-run society with a single party running the show.  There is no problem, now get back to work slave.  I'll only add that corruption is the result of the failures of central planning.  Since all eCONomies are really local, locals have a tendency to resort to any means of survival when they know they are being sold down the fucking river.  You want to do _________ in my town, you're going to have to pay...

Mon, 03/18/2013 - 13:48 | 3343341 Glass Seagull
Glass Seagull's picture

 

 

Rally of hope helped to lure the flies into the spider's parlour.  

 

 

Mon, 03/18/2013 - 14:37 | 3343585 Edward Fiatski
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Bet the CEO got balls deep in at the top, so all potential company rosses have since now been erased.

Have a nice day :)

Mon, 03/18/2013 - 13:51 | 3343356 swissaustrian
swissaustrian's picture

Solar ftw. If the industry can't compete using slaves and ip theft in China, it will never be profitable.

Mon, 03/18/2013 - 14:07 | 3343420 ParkAveFlasher
ParkAveFlasher's picture

Silver, bitchez!

Mon, 03/18/2013 - 14:28 | 3343523 Carl Spackler
Carl Spackler's picture

Somebody tell Obama that, alpenboy !

Mon, 03/18/2013 - 14:32 | 3343554 swissaustrian
swissaustrian's picture

Imho, Obama doesn't care about profitability, solar subsidies are returns on campaign donations in the US. He can spend your money to give cronies their donations back with 1000s of % in interest.

Mon, 03/18/2013 - 18:43 | 3344819 political_proxy
political_proxy's picture

Øbama is a Lenin ideologue.

The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.

-Vladimir Lenin

Mon, 03/18/2013 - 13:51 | 3343357 hedgeless_horseman
hedgeless_horseman's picture

 

 

Poor, poor, Leo.

Mon, 03/18/2013 - 14:03 | 3343400 Theta_Burn
Theta_Burn's picture

Oops, I used to tinker with this stock, even before Leo's all in recommendations. I made some money once or twice....

 

Mon, 03/18/2013 - 15:18 | 3343856 Non Passaran
Non Passaran's picture

I'm sure he'll do okay. It's a buy and hold kind of stock. 

The patient investor will ultimately be rewarded.

/sarc

Mon, 03/18/2013 - 13:51 | 3343359 azzhatter
azzhatter's picture

I did business with Sun Tech. What a freakin mess this company is.

Mon, 03/18/2013 - 13:51 | 3343360 tahoebumsmith
tahoebumsmith's picture

 Holy Po Fry Rye Batman, oh the Great unravel is picking up speed...

Mon, 03/18/2013 - 14:03 | 3343401 Zen Bernanke
Zen Bernanke's picture

but the ES has recovered 20 handles off the lows...all is well, all is well! 

Mon, 03/18/2013 - 14:05 | 3343411 Golden_Rule
Golden_Rule's picture

hmmm, withdrawing liquidity AND letting institutions fail....  Are we seeing the beginning of free-market China?  Now that would be a beast to contend with.

Mon, 03/18/2013 - 19:54 | 3345092 SKY85hawk
SKY85hawk's picture

China should use  Glass-Stegall.  Isn't that what helped send Keating to jail in the S&L crisis of 198x?

Glass-Stegal was done to protect the people from scurrilous bone-head bankers that only shoot for the moon with Other-Peoples-Money!

Oh yeah, the politicians that allowed these travesties are TBTF (Too Bought To Function),  duhhhhhh.

 

Stop talking about new legislation and reactivate that which is proven to be effective!

 

Mon, 03/18/2013 - 19:54 | 3345093 SKY85hawk
SKY85hawk's picture

China should use  Glass-Stegall.  Isn't that what helped send Keating to jail in the S&L crisis of 198x?

Glass-Stegal was done to protect the people from scurrilous bone-head bankers that only shoot for the moon with Other-Peoples-Money!

Oh yeah, the politicians that allowed these travesties are TBTF (Too Bought To Function),  duhhhhhh.

 

Stop talking about new legislation and reactivate that which is proven to be effective!

 

Mon, 03/18/2013 - 14:19 | 3343479 thismarketisrigged
thismarketisrigged's picture

as many people have posted, while it may effect other countries, the u.s stock market will never go down bc the mother fucking fed members, who should die terrible deaths, continue to prop the market up.

 

how the fuck is it that there is actually a real crisis going on in cyprus effecting the banks, yet this market reacts like all is positive, yet when we have the whole fiscal cliff shit, which was never even solved just pushed off, the market reacts like there will never be a crisis in the world again, moving up 2-3 percent for 2 days straight,

 

i want to punch bernanke and wall st bankers and obama in the face so fucking badly

Mon, 03/18/2013 - 15:16 | 3343845 Non Passaran
Non Passaran's picture

They're creating a chance for you to buy more PMs at nice prices. Use it.

Mon, 03/18/2013 - 15:26 | 3343532 MrPalladium
MrPalladium's picture

In cases of probable default where there are assets with some value, bankruptcy is filed by the defaulted note holders. The fact that none of the note holders have filed involuntary BK tells you that what assets exist are woefully and obviously insufficent to reach the unsecured debt that has just been defaulted. In truth, the entire capital structure of STP is a zero. In any reorganization the current stockholders will get nothing.

Most common stock investors were lulled into investing in STP thinking that it was a Chinese company, In fact, STP is a Cayman Islands holding company. The equity of that holding company and almost certainly all of its debt is worthless. Chinese banks have made secured loans to the Chinese subsidiaries and it is these secured Chinese bank loans that will end up controling the factories, protecting the Chinese jobs and providing Chinese employment.

By allowing this bankruptcy, the Chinese government is signalling to the world that it is not going to protect unsecured debt, as all other advance economies are desperate to do. They are signalling that with 3 trillions in currency reserves and untold stockpiles of purchased and domestically produced gold, their government is not a puppet of the financial industry, as are all the governments of developed economies which live in mortal fear that a default on even modest amounts of unsecured debt could pull the plug on the daisy chain of collateral holding the overlevered financial system afloat.

I find it amusing that nobody has picked up on the overwhelming probability that those who are threatening suit against STP on their bond holdings are the smart money who acquired those bonds as a hedge against massive short sales of the common stock. Anything that speeds the process shortens the time they must wait for the common to go to zero, thus increasing the rate of return on the capital arb position.

http://qz.com/63982/why-suntechs-aggrieved-bondholders-have-little-chanc...

Mon, 03/18/2013 - 15:23 | 3343886 dscott8186
dscott8186's picture

Well Tyler, your point may be valid but too ethereal by implying the whole Chinese economy.  Let's connect the dots in a more down to earth manner. I would say given the example of the solar company you gave and in context with Solyndra here in the US, that the solar industry in general is a huge bust because of its over capacity issue.  The Green Scam to hustle everyone into buying solar panels greatly subsidized by tax dollars has not wildly come close to the return on investments salivatingly dreamed of by Al Gore and company (Green Profiteers).

Who knows, at some point those investors left remaining who only have their BVDs may yet reap a profit if government leaders and their crony conspirators screw up badly enough to crash the world economy on the cliffs of their greed and shut down the electric utilities in the process.  The elites do have this uncanny ability to cut off their noses to spite their faces when it comes to sustainably making money over the long haul.  You would think by now that they would have learned that the Win/Win solution would reap them greater profits than simply impovershing the country. But then the attribute of a greedy person is their short term interest at the expense of long term profitability. 

Mon, 03/18/2013 - 16:27 | 3344193 MrPalladium
MrPalladium's picture

I agree with your point that it is premature to assume that the restructuring of STP is a sign of an economy wide credit collapse in China.

However, juxtaposed to the news about Cyprus, where the EU has declared that they will steal bank deposits rather than allow unsecured debt to be restructured, it is clear that the STP restructuring is going to wipe out all of the unsecured debt of the Cayman Islands holding company. The earth shaking news is two fold. First China is declaring its independence from the "gentlemens' agrreement" that unsecured debt must be protected at all costs lest the over levered Western daisy chain of collateral unwinds and deflation follows after.

Second, the Chinese government is declaring that their economy is strong enough to default unsecured debt and that unlike Western economies, they actually care about the Chinese people and value their jobs more highly than they value their relations with uncautious foreign lenders. It is this nationalist statement to the effect that the Chinese people and workers come first that is so radical and important. The restructuring and wiping out of STP unsecured debt is a sign of financial strength, not weakness.

It is a bold statement by an up and coming financial elite that they are not so easily predictable. How many modest sized unsecured debt investments does China have sprinkled throughout the Western financial industry, which can be sold out from under the gentlemen's agreement daisy chain at any time? Deluded financial industry types view such investments as support. I view them as a potential threat, and a clear statement that China is preparing to survive a financial meltdown in Europe, the U.S. and Japan and could control the timing of such an event.

Only and idiot assumes that an enemy is a friend

Mon, 03/18/2013 - 19:16 | 3344920 WallowaMountainMan
WallowaMountainMan's picture

o/t

with china declaring an end to the gentlemen's agreement, does this attitude ripple over to the massive unsecured shadow banking system?

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