Another Chinese High Yield Bond Issuer Declares Bankruptcy

Tyler Durden's picture

Another week, another Chinese default.

A month after Chaori Solar's default turned on its head a long-held assumption that even high-yielding debt carried an implicit state guarantee, another Chinese firm has succumbed to the inevitable outcome resulting from a lack of cash flows. As a reminder, 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. However, in that case the guarantor of that bond eventually agreed to fund the required interest payment, resulting in the first bailout of the first high yield default. Still if Xuzhou didn't want the distinction of the first Chinese HY default, many are lining up for that particular prize - such as 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.

According to Reuters, 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.

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.

And it is no secret that as the weeks keep rolling in, so will many more defaults:

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.

Naturally, there is the possibility that this too bankruptcy will be delayed by a post-last minute payment by the guarantor, another polyester firm.

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.

Still, even with a bailout, the scariest thing is that the value of the assets backing the bond at the originator level is a resounding zero: "The phone number on Zhejiang Huatesi's website has been disconnected, according to an automated message."

Expect many more phone disconnections in China as the biggest ever Minsky moment begins to unwind.

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15horses1donkey's picture

When I pickup the phone, there's still nobody home.

Serfs Up's picture

A default?  It's almost like they have a functioning capital market in China.



SafelyGraze's picture

the solution is as simple as it is obvious:

in order to pay the interest on the bond, they should issue a new bond that pays higher yield

it is a competitive marketplace, so the higher yield must be set accordingly in order to attract investors

this strategy has proven, time after time, to be the best 

ilion's picture

It's starting to look like 2008 in the US. Will the history actually repeat itself?

Dubaibanker's picture

Please see the growth of China here.....

Couple of small defaults on the way to global stardom are better than a massive destabilsing one!

Half a trillion here in US dollars in healthcare....

16 bn US dollars there in helping rundown communities...

2.76 bn US dollars here in the largest money manager of Europe...

and pretty soon you are talking real money and major acquisitions....And all of this just in the last 1 week.....

And then the foreigners line up outside your country to increase trading and investing in your currency and grow it by 2.7 times, yes, thats 270% in just ONE quarter of what was done in ALL of last year in just ONE CITY.....

But silly FT (oops that silly Lombard Odier article in the FT....Here is that ridiculuos article on China being compared to US subprime... and silly western media still keep saying China is going to collapse...If they would be collapsing, would they really be buying the biggest company in Europe in each sector or biggest company in various sectors in USA? 

I am pretty sure they would not, and would be busy managing the crisis back home, but if there is no crisis, only then they would look overseas, would they not? 

Bankers R Wankers's picture

2.7B for the LARGEST money manager in Europe? You must be a banker! (because your full of it) the largest is UBS the 2nd is Allianz the Third is AXA. 

Dubaibanker's picture

The Reuters article said one of Europe's biggest money managers.....

Your point taken.


random999's picture

Are you asking if Chinese government will let ICBC go bankrubt? Answer is simple: No


A few corporate bonds wont affect too much. If you have an 11% interestrate you have to anticipate that there is some kind of risk involved.

sessinpo's picture

negative rates       Do dey have shrinks over dare, cause most Chinese people are tiny to begin wit.


Chinese in the north are tall may be 5'11 to 6'2''

Chinese in the south are shorter may be 5'4'' 5'7''.

A Chinese man has the record of being the 8th tallest person recorded at 8 feet 1 inches. The 14th tallest man recorded was also Chinese at 7 feet 9 inches.

Maybe it is your mind that is tiny to begin wit.

Ban KKiller's picture

They are home, out in the back yard throwing pigs into the river. 

Come on, perfect song for Roger, right?


GetZeeGold's picture



Sooooo......not reduced by $2500?

inky's picture

Slowly but surely the defaults will pick up pace,this should be entertaining.


BandGap's picture

Should be entertaining? This is the thrill of watching a tsunami coming in. The wave has started, it's just miles from shore. The sad part is that many won't be able to get out of the way.

inky's picture

Bandgap the people in the know would have seen this coming a long way off.

But for the people that dont see it coming....yep i agree it will be a sad time for them.

Other thoughts tho = dont the chinese public have a shit load of gold ?

Sudden Debt's picture

What the momo's don't know the momo's don't care.

The MSN won't air this stuff untill it's way to late.

Sudden Debt's picture

been waiting for over 7 years now...

if I would be comming so slow, MY SEXLIFE WOULD BE AWESOME!

Calculus99's picture

Got kids? Want to be a good father/mother?

Offer them this advice -

If you ever come across an investment banker pitching an investment product that you can't explain to a 14 year old (in less than 5 mins) RUN AS FAST AS YOU CAN because there's a 90%+ chance you're being setup.

The above is why ALL investment bankers are officially banned from the small lane I live on, plus most policitians, especially Tony Blair.

Ban KKiller's picture

"Secured with land rights", clear title no doubt!

Crooks selling to other crooks with no due diligence as loans are all back stopped...or were. Trust a Chinese business man?, especially bankers.

Nail guns are cheap there, right?

NoDebt's picture

There was a M*A*S*H episode about promises backed by promises backed by nothing.  In the end, one broken promise and the whole chain fell apart.  I didn't know the word rehypothecation then.

bluskyes's picture

Are you saying that a collateral chain, or chain of ownership is only as strong as the biggest liar?


Latitude25's picture

60 million yuan?  LOL  The value of an average house in California.  So this is evidence that China is collapsing?  So far these defaults aren't even worth reading about.  Get back to me when something really happens like what is ongoing in the US.

q99x2's picture

Is Greece going to default?

GetZeeGold's picture



Yes.....but not technically.

AdvancingTime's picture

Much of the recent growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured massive amounts of money into the system. This money encouraged expansion and construction with little regard as to real demand or need. Now China has entered a great credit trap.

China is awash in overcapacity and debt. After several years of growing debt concern is rising the whole unstable pyramid is about to come crashing down bringing China and possibly the global economy with it. This is not just about writing off a few bad loans. The shadow banking sector is so large that concerns exist about contagion and a domino series of defaults that might rack the economy as savers lose money.More on this subject in the article below.