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China's Third Bond Default Imminent: Coke Supplier To Miss Payment
A little over a month ago, China witnessed its first default by a state-owned enterprise when Baoding Tianwei Group, a subsidiary of state-run China South Industries Group, defaulted on a $14 million coupon payment. That event raised two important issues. First, it suggested that Beijing will not necessarily step in to rescue state-affiliated companies who find themselves in financial trouble and second, it underscored the degree to which China’s $14 trillion corporate debt pile presents a very real risk especially considering the rapidly increasing number of non-performing loans on the books of the country’s banking sector.
Today, we get still more evidence that China may be headed for a debt disaster as a third company has now defaulted on its onshore bonds.
This time it’s soft drink bottle maker Zhuhai Zhongfu Enterprise Co which, as Bloomberg reports, will come up nearly 450 million yuan short when a principal payment for paper issued in 2012 comes due on Thursday. Here’s more:
Zhuhai Zhongfu Enterprise Co., which supplies bottles for Coca-Cola Co. and PepsiCo Inc. in China, can only repay 148 million yuan ($23.9 million) of the 590 million yuan principal, according to a statement to the Shenzhen Stock Exchange Monday. It plans to pay all the 31.152 million yuan of interest. The manufacturer, which isn’t state-owned, sold the 5.28 percent securities in 2012…
Han Huiming, board secretary at Zhuhai Zhongfu, said when reached by phone Tuesday that the company will try to raise funds for the bond payment until the last moment.
The manufacturer, which is based in the southern city of Zhuhai and employees about 4,000 people, said in a May 21 statement that a bank consortium rejected its application for 500 million yuan of loans in May.
The Zhuhai branches of China Everbright Bank Co. and Bank of China Ltd. have limited its freedom to spend the 61 million yuan of capital on its accounts, it said.
Because Zhuhai Zhongfu is having a “liquidity crisis,” the company can’t collect enough money for the payment through its own business operations, according to the statement Monday.
Zhuhai Zhongfu’s orders have declined significantly since 2012 as its biggest clients increased their own production of bottles, according to a report from China International Capital Corp. on May 11. The company’s business with its three largest clients Coca-Cola, PepsiCo and Uni-President China Holdings Ltd. generated only 33 percent of revenue last year, down from 49 percent in 2011, according to CICC. Coca-Cola remains the manufacturer’s biggest customer, according to board secretary Han.
The shift comes as Coca-Cola and PepsiCo are increasingly focusing on cost-cutting to help support operating margins amid waning soft-drink demand, according to Bloomberg Intelligence.
All of the above notwithstanding, the company’s Shenzhen-listed shares had risen more than 120% YTD before they were halted last month with equity ‘investors’ completely ignoring the fundamental story as they have with virtually everything else that changes hands on the exchange which is now trading at a mind-bending 71 times earnings after at least 250 individual names traded limit-up on Tuesday.
Indeed, you didn’t even have to look at an income statement to know how risky of a bet this was because the debt was yielding near 20% before it was delisted last year.
The company’s notes yielded 19.33 percent in the secondary market on June 27 last year before being delisted from the exchange, according to exchange data.
Still, investors remain confident that Beijing, despite rhetoric to the contrary, will be loath to allow onshore defaults as $17 billion in principal payments come due in 2015, a figure that is set to rise exponentially over the next six years. Here's Bloomberg again:
The People’s Bank of China may coordinate loan support for Baoding Tianwei Group Co. after it became the first state-owned entity to default on a coupon payment in April, OCBC said, citing local media. Restaurant-turned-Internet firm Cloud Live Technology was the first onshore issuer to miss a principal payment in April and has raised funds from “unclear” sources to partly repay noteholders, OCBC said.
Zhuhai Zhongfu, based in the southern city of Zhuhai, is still short 442 million yuan for a bond payment due Thursday, the company said in a statement to the Shenzhen stock exchange Monday. It will try to raise more money by May 26, it said.
Narrowing spreads on onshore bonds suggest investors are still counting on state guarantees, said OCBC, which compared Baoding’s situation with bailouts last year for Shanghai Chaori Solar Energy Science & Technology Co. and a trust product known as China Credit Equals Gold No. 1. The difference between AAA and BBB+ rated yields has fallen to 933 basis points from 942 at the start of the year, while the gap between AAA and AA notes shrank to 114 from 129, according to the report.
Chinese companies must repay an equivalent $16.9 billion of maturing onshore notes in 2015, Koh estimated in the report. That increases every year and will peak at $192.3 billion in 2021. Some 65 percent of institutions expect at least one more onshore default this quarter, according to a Bloomberg survey of 20 banks, brokerages and money managers published on May 18.
Clearly, this is a rather large problem, but as we outlined in "How China's Banks Hide Trillions In Credit Risk," the government will often force banks to roll over maturing debt in order to paper over (literally) what is almost certainly a deteriorating situation and in fact, the PBoC recently did a complete 180 on regulations around local government financing via LGFVs in an effort to jumpstart the shadow banking credit creation machine, a move which Fitch calls "an explicit form of regulatory forbearance."
Whatever the case, it's becoming increasingly clear that the combination of slumping economic growth and $28 trillion in debt has the potential to trigger a wave of defaults from both state-run and private borrowers, a state of affairs which will test Beijing's resolve when it comes to projecting stability in the country's credit markets.
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Ultimately, SDRs to the rescue.
"The Yuan is not undervalued."
Maybe we pass the hat around here at ZH and everyone chip in so they can make the payment?
Maybe the Chineese give us a man-made island as thanks? Hey, we could open a Casino!
The Coke must flow.
-Giant Worm
But...but...Zero Hedge has been on a China & Russia booster propaganda spree as of late, speaking up the health of both nations' economies and social stability relative to the U.S. or most other nations....
...How can this be? How can Chinese firms be failing & defaulting on debt obligations at such an accelerating pace?
Couldn't agree more. China to the rescue, China next reserve currency....China to the gold rescue. China warns, China builds......
Peel that union back and find a big rotten debt ridden slug that will eat your eyes out IMO.
China is going to be sucking wind in the soon coming FX blow out, watch.
"...China's Third Bond Default Imminent: Coke Supplier To Miss Payment..."
Hooker Supplier Payments Received On-time. Chinese Banks Propose Coke/Hooker Swaps to Stabilize Markets, Maintain Liquidity.
I know I read "missed payment to my coke supplier..."
China is an economic, unstoppable juggernaut with an unstoppable military, benevolent government & is the new dominant superpower.
Zero Hedge, quoting Russian Times, stated so!
It may be time for these corporation to "Count their losses", because let's get real here, going to nuclear war over some financial losses is idiotic...
(The God Russia didn't go nuclear for their billions in losses @ Cyprus)
Long the USD via UUP calls!!! Let the currency wars continue!!!
bullish
If only coke was the real thing like it was in the beginning sales would explode again.
Now that you mention it..
Some years ago I drank a bottle of cola from a Chinese restaurant. It immediately brought back all of the taste and flavor of the Coke I used to drink as a kid in the 60's.
It may have been made in Mexico. Anyways, I dont have any sympathy for any of this soda crap companies. Coke and Pepsi and all the rest of you: Go To Hell!
Me Chinese, me play joke, me...NO!!!
Ah, Coca-Cola, a.k.a. bites the wax tadpole.
Somehow Hunter Biden came to mind when I saw "Coke Supplier" in the title.
Chief accountant Hu FlungDung
told Sum Ting Wong that
Ho Lee Fuk was fully responsible.
Must be true, read it in the tabloids waiting in the supermarket line.
They're just breaking us in Easy, for the Big Busts coming later...
How many more companies like this are there? This is typical of China business management... only based on cashflow as profits are only an afterthought
i get what your saying in the big picture, but we're talking about a $14mm default. Wake me when shit gets real
Anyone else finding it ironic that a drink company has liquidity problems?
Well maybe if they would partner up with Jack Daniels, things would improve, if not, at least they won't care.
"Jekk an Crok" just doesn't sound appealing....
Does corporate debt default happen in US all the time? That why their bonds are high yield bond. Why do we impose such a high standard on Chinese companies? We even have cities defaulting on their bonds.
maybe this is how the U.S. takes over China, through default. I suspect that it will get real ugly in China before the smoke clears.
The world has defaulted on banksters everywhere already. They are printing to keep the defaults at bay; so people won't round them up and hang them for their crimes. They can put TBTF above the law but they can't stop the law of nature from claiming its fee. We will come rejoicing bringing in the thieves.
I'm sorry, I thought this was the great Middle Kingdom that was going to make the US irrelevant by terraforming the South China Sea... by invading North America with PLA human waves until there's nothing left for even the locusts to consume...
what, you're telling me they're a rotting shell of cash flow and "questionable accounting" issues? a logistical sinkhole? nah, say it ain't so...
You can take the horse to the trough, but you can't force it to drink. I take it the Chinese prefer their own counterfeit Coke to "the real thing?"
Since the co's valuation is at 10 billion yuans, selling a few additional shares will solve the problem in an eye blink.
The coming economic crash will be a global event. China is just one nation, like every other, that is hugely in debt with no way to pay it off. It's a global debt bubble and all bubbles eventually burst as this 'Anatomy of a Bubble' explains...
http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...