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Second Chinese Bond Company Defaults, First High Yield Bond Issuer

Tyler Durden's picture




 

In the middle of 2012, to much yield chasing fanfare, China launched a private-placement market for high-yield bonds focusing on China's small and medium companies, that in a liquidity glutted world promptly found a bevy of willing buyers, mostly using other people's money. Less than two years later, the first of many pipers has come demanding payment, when overnight Xuzhou Zhongsen Tonghao New Board Co., a privately held Chinese building materials company, failed to pay interest on high-yield bonds, according to the 21st Century Business Herald.

The company located in the eastern province of Jiangsu, missed the 10 percent coupon payment due March 28 on the notes, which it sold 180 million yuan ($29 million) of last year in a private placement.

As predicted, once Chaori Solar opened the gates for China's default superhighway two months ago, and the realization that China will no longer bail out any and everyone, the default deluge has begun.

Bloomberg reports:

“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."

 

Sino-Capital Guaranty Trust, the guarantor for the Zhongsen Tonghao security, refused to pay on behalf of the company, according to the Guangzhou-based financial newspaper.

 

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.

 

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.

 

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.

 

“SME private bonds are now facing relatively high risk,” said Pengyang’s Yang. “We expect more defaults to come in this area, especially those private enterprises without guarantees.”

We have written extensively about the imminent funding and liquidity threats facing China's real estate developers following the collapse two weeks ago of another closely held company based in neighboring Zhejiang province, property developer Zhejiang Xingrun Real Estate Co. This in turn has sent shockwaves throughout the Chinese housing market, and especially the offshore cash parking version, where recently we have witnessed the start of a mass liquidation wave in Chinese offshore property haven, Hong Kong. However, it now appears that the funding danger is becoming more pervasive than even we expected, and as a result a major adverse risk and rate repricing is imminent.

And while this default came out of the blue, the one we are waiting for is that of the Magic Property which we profiled before:

31 Mar 2014, Rmb196mn borrowed by Magic Property & arranged by CITIC Trust

  • Details: invested in an office building in Chongqing. The Chongqing developer ran into financial problems in mid-2013. CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.
  • Potential outcome: The developer and the trust company may share the repayment.
  • Reasons: 1) When CITIC Trust sold the product, it did not specify the underlying investment project. 2) The local government has intervened, fearing social unrest. A local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer.

We can't wait to see the look on Chinese investors" faces when they too learn the term re-re-re-re-rehypothecation.

 

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Tue, 04/01/2014 - 08:06 | 4613337 highly debtful
highly debtful's picture

That chart is looking mighty scary.

Tue, 04/01/2014 - 08:24 | 4613344 medium giraffe
medium giraffe's picture

Western investors will probably face a very unsympathetic Chinese government.  Congratulations, you've just been swindled (again).

Tue, 04/01/2014 - 08:53 | 4613417 Rafferty
Rafferty's picture

Coupon of 10%???    If it seems to be too good to be true it usually is.

Tue, 04/01/2014 - 08:59 | 4613430 medium giraffe
medium giraffe's picture

April Fools!

Tue, 04/01/2014 - 10:31 | 4613643 prains
prains's picture

beware, the fools of April!

Tue, 04/01/2014 - 08:12 | 4613347 buzzsaw99
buzzsaw99's picture

only certain companies will be allowed to fail.

Tue, 04/01/2014 - 08:14 | 4613350 fonzannoon
fonzannoon's picture

That has to be exactly right, and the market must know it.

Tue, 04/01/2014 - 08:20 | 4613356 Bearwagon
Bearwagon's picture

... or else!

Tue, 04/01/2014 - 08:55 | 4613418 BandGap
BandGap's picture

That is going to be nearly impossible. Human nature will rear it's ugly head at some point.

Even in orderly herds there are always some strays.

Tue, 04/01/2014 - 08:32 | 4613373 Seasmoke
Seasmoke's picture

Just have to get to 2016 alive and all will be fine.....

Tue, 04/01/2014 - 08:56 | 4613425 BandGap
BandGap's picture

What exactly does that mean?

Tue, 04/01/2014 - 08:33 | 4613376 elwind45
elwind45's picture

just hotwire the ATM

Tue, 04/01/2014 - 08:41 | 4613392 AdvancingTime
AdvancingTime's picture

This is where the cracks will really start to show. Every country has unofficial lenders, but in China individuals, companies and even local governments who can not get loans from state-controlled banks have been on a borrowing binge from these unofficial sources. China is awash in overcapacity and debt.

After several years of growing debt loads concern is rising the whole unstable pyramid is about to come crashing down bringing China and possibly the global economy with it. The economic efficiency of credit is beginning to collapse in China and the unwinding of China’s giant credit spree could be vary painful. More on China's credit trap below.

http://brucewilds.blogspot.com/2014/03/china-and-great-credit-trap.html

Tue, 04/01/2014 - 08:42 | 4613394 elwind45
elwind45's picture

The solution is built in blame your neighbor

Tue, 04/01/2014 - 08:47 | 4613403 ElvisDog
ElvisDog's picture

China is one big ponzi scheme waiting to implode. Everyone thinks they're getting paid 10% interest on their "investments" in these companies. 1.3 billion stupid people who's rationale boils down to "the government won't let these investment companies default".

Tue, 04/01/2014 - 09:18 | 4613460 thestarl
thestarl's picture

The place is just one big cesspool of corruption how could it have ever possibly ended well?

Does anyone not remember the Soviet Union? All the big industries/big four banks state run with let me guess 80% of the population living on subsistence income.Yeah the party, TPTB will dish up a few corruption show trials all to little to late.  Again the game is fucking over maybe who knows even more stimulus lets just wait and see.

Those CCFD's ,man they really take the cake lol.

 

Tue, 04/01/2014 - 09:30 | 4613494 RadioactiveRant
RadioactiveRant's picture

The place is just one big cesspool of corruption how could it have ever possibly ended well?

Be more specific, that could be anywhere.

Tue, 04/01/2014 - 09:48 | 4613543 FreeNewEnergy
FreeNewEnergy's picture

Hey, if they're defaulting on the coupon (interest), what's happening with the principal? Uh, oh. Sum Ting Wong.

The threat of a massive global market crash is extremely high right now, but I still don't see anyone scurrying for the exits. Stocks just keep ramping higher. Is everyone delusional, thinking they can get out just ahead of the crash? If that's the case, then I'm right, it's time to get short in a very large way, because when everyone sees it, but denies it, the crash becomes a certainty.

Or, is the fraud and the Fed that powerful? That they can avert a crash by printing without end? If that's the case, I'll be very wrong, but the result will be hyper-inflation, which is probably worse.

I'm been in cash and silver forever. I'll stay there, but some of my money wants to short equities. I have good reasons, but the market is disagreeing. I'll wait a little longer, since I don't have to be in precisely at the top. When this bitch begins to go, it is going global and it will go quickly.

Tue, 04/01/2014 - 10:03 | 4613570 hairball48
hairball48's picture

"Is everyone delusional, thinking they can get out just ahead of the crash?"

In a word, Yes...and not just in China

Tue, 04/01/2014 - 10:24 | 4613632 Ban KKiller
Ban KKiller's picture

Yield chasing idiots...They are everywhere!  Add crooked accountants to the mix, HOT, HOT money, what do you really expect? Gov't guaranteed returns? Another sucker to sell to?

Greed...now served to the masses with predictable results. 

 

Tue, 04/01/2014 - 12:29 | 4614006 SmittyinLA
SmittyinLA's picture

most of the "investors" in China are party members and factory owners, the other 90% are just trying to survive, hopefully the Chinese workers will get smart and impose enduring liabilities on factory owners and hopefully Americans will get smart and sell out those looter-exploiter factory owners and turn them over to Chinese Tax authorities. 

Yo China, we still got Ye Gon http://en.wikipedia.org/wiki/Zhenli_Ye_Gon  does he owe any back wages & benefits to his phamaceutical workers back in China?

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