It seems like it was only yesterday when the first official Chinese corporate default in history (there have been many other ones in the past but all were quickly masked by the government to avoid a panic), Chaori Solar, entered the history books. Now it's time for default number in the country's onshore bond market as Huatong Road & Bridge Group, a company whose businesses includ bridge and highway construction, real estate, coal, eco-friendly construction materials and agriculture-related projects, based in the northern province of Shanxi, said it may miss a 400 million yuan ($64.5 million) note payment due July 23, according to a statement to the Shanghai Clearing House yesterday.
As now traditionally happens in China, first the company is exposed for being a fraud (with its management admitting to its sins, never to be seen again) and then the corporate bondholders are left holding the bag. This time won't be any different: according to Bloomberg Chairman Wang Guorui is "assisting authorities with an official investigation." Wang was removed from the Chinese People’s Political Consultative Conference Shanxi Committee on July 9 for suspected violations of the law, according to an official statement and media report last week.
What happens next is clear: "It’s very likely the company will default,” said Xu Hanfei, a bond analyst at Guotai Junan Securities Co., the nation’s third-biggest brokerage. “If it does, the event will have a big impact on investors’ risk sentiment."
Another staple of Chinese bond defaults: when reached for comment, the now shell of an insolvent company always refuses to make any comment:
An operator who answered the main line of Huatong Road today wouldn’t comment on the issues and declined to transfer the call to related people.
Also, it appears when it comes to default risk, China's rating agencies are about as ahead of the curve as their US peers: "China Lianhe Credit Rating Co. cut the company’s rating to BB+ from AA- to reflect the builder’s high default risks, according to a statement from the risk assessor today."
Some more on Huatong:
Huatong Road said in its statement yesterday that it’s exploring various channels to raise funds to pay off the one-year bond, according to the statement. It owes 429.2 million yuan in interest and principal by the due date, it said. The builder, which was set up in 1998, had 5.8 billion yuan of debt and 10.7 billion yuan of assets as of March 31, according to a separate statement in April on the Chinamoney website. It reported a profit of 62.7 million yuan for the first quarter.
We can't wait to find out just how many of those "billions" in assets have been rehypothecated countless times leading to pennies on the dollar, if any, recoveries for bondholders.
As for the big picture:
“The possible default of Huatong Road is another sign of increasing default risk among small and weak bond issuers in China as slower growth hits companies in sectors that are struggling with overcapacity and tougher financing conditions,” said Christopher Lee, Hong Kong-based managing director of corporate ratings at Standard & Poor’s. “Builders are vulnerable as the property downturn has curtailed construction investment which weakens their order book and revenues.”
“Possibility of government intervention is low. Since last year, the new administration has been taking a more market-oriented approach,” said Ivan Chung, Hong Kong-based senior vice president at Moody’s Investors Service. “Regulators realize that if they provide support by intervening, it will also create more moral hazards, which is not good for the market.”
Chung said more defaults may occur in sectors that are facing overcapacity, such as construction, steel and commodities.
Actually, the main reason why a deluge of defaults is inevitable, whether Beijing likes it or not, is that as we will report shortly, far from enaging in any deleveraging or "tapering" of credit injections, in the first quarter, Chinese banks saw the biggest increase in their assets in history! And since the bulk of these are in the form of loans going to already insolvent and materially impaired business, all China is doing now is throwing trillions in good money after bad. Which also means that in deciding to delay the Minsky unwind if only by a few months, China has just assured that when the collapse finally comes, it will be that much more acute.