Copper futures prices are plunging once again, back under $3.00 back at the lowest levels since July 2010. The last 3 days have seen prices drop over 7.5% as China credit contagion concerns surge and letters-of-credit from last summer's cash-for-copper financing deals [9]roll-off and businesses need the cash. The vicious circle of tumbling collateral values (copper and Iron ore) is exacerbating the tightening financial conditions in China as banks hoard liquidity, unwilling to lend to the over-capacity industries that the government has deemed unworthy. Rumors today of further defaults triggered this latest drop, and as we noted previously, there are a lot more to come [10].
Copper futures intraday are collapsing...
[11]
Which takes it back to July 2010 levels...
[12]
and LME Copper (where much of the L/C cash-for-copper deals were held) [9]is also in freefall.
[13]
Rumors today of another Chinese corporate default, the second in a row are adding fuelt to the fire. Via BusinessWeek, [14]
Baoding Tianwei Baobian Electric Co. (600550)’s bonds and stock were suspended from trading today after the Chinese electrical equipment maker said it reported losses for a second year running.
The company, which also makes solar panels and is based in the northeast province of Hebei, reported a net loss of 5.23 billion yuan ($852 million) in 2013 versus a 1.55 billion yuan earnings deficit a year ago, according to a statement to the Shanghai stock exchange yesterday. The exchange, in line with its rules, will decide in seven trading days whether to continue the trading halt on Tianwei Baobian Electric’s bonds until its losses are reversed.
Investor scrutiny of China’s onshore bond market is mounting after Shanghai Chaori Solar Energy Science & Technology Co. last week became the first company to default. Chaori Solar’s failure to pay has stoked speculation more companies may miss debt deadlines also.
This should not be surprising - there are many more trusts and bonds to come... [10]
[15]
Naturally, for an economy in which credit creation is of utmost importance, the loss of one such key financing channel will have very unintended consequences at best, and could potentially lead to a significant "credit event" in the world's fastest growing large economy at worst.
And don't look at what's coming down the shadow banking default pipelines, as we showed before [10]. via BofA's David Cui
12 potential defaults reported by the media
Table 1 summarizes the information on the 12 major potential defaults in the trust industry that have been reported by the media. Most of them are coal mine related and heavily concentrated in one area, Shanxi Province. So far it seems to us that most of them may get extended upon the due date. The only exception over the next few months appears to be a product issued by China Credit Trust for a lead and zinc miner in Sichuan, Nonggeshan. Even without any major default over the next few months, the process of debt restructuring can be messy and weigh heavily on market sentiment.
[16]
19 Feb 2014, Rmb109mn borrowed by Liansheng & arranged by Jilin Trust
- Details: This Rmb109mn tranche is part of a six-tranche trust product worth a total of Rmb973mn arranged by Jilin Trust for Liansheng, a Shanxi coal miner. The other five tranches have matured since 2H 2013 and remain overdue.
- Potential outcome: Repayment may be extended.
- Reason: Liansheng is undergoing a debt restructuring coordinated by the Shanxi provincial government. 1) The provincial government plans to help out involved financial institutions to ensure the region’s access to ongoing financing. According to people close to the situation, the implicit guarantee practice will most likely continue with the Liansheng’s case. 2) Trust companies may have to follow banks to help the miner out. Banks have agreed to extend their mid/long term loans by three years. Top 3 banks have total debts of Rmb10.6bn to Liansheng; top 3 trust lenders, Rmb3.7bn.
(Shanghai Securities News, 2/11; Economic Information, 2/13)
21 Feb 2014, Rmb500mn borrowed by Liansheng & arranged by Shanxi Trust
- Potential outcome: repayment may be extended.
- Reason: Same as the Jilin Trust case.
(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)
07 Mar 2014, Rmb664mn borrowed by Liansheng & arranged by Changan Trust
- Details: Other than the Rmb664mn product to mature on Mar 7, Changan Trust arranged another two products for Liansheng, totaling Rmb536mn which matured in Nov 2013. Both products remain overdue.
- Potential outcome: repayment may be extended.
- Reason: Same as the other Liansheng cases.
(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)
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.
(Source: Financial Planning Weekly, 3/6/2013; Guangzhou Daily, 4/6/2013, Boxun, 5/10/2013)
14 May 2014, Rmb1.5bn borrowed by Liansheng & arranged by China Jiangxi International Trust
- Potential outcome: repayment may be extended.
- Reason: Same as the other three Liansheng cases.
(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)
30 May 2014, Rmb140mn borrowed by Nonggeshan & arranged by China Credit Trust
- Details: invested in a lead and zinc mine in Sichuan.
- Potential outcome: Likely to default.
- Reasons: 1) Compared to coal mines of Zhenfu and Liansheng, the lead and zinc mine is a much less attractive asset: it is located in the mountains over 5,000 meters in altitude, inaccessible for 6 months of the year due to weather conditions, with low lead/zinc content; 2) According to an unnamed regulator, the central government is comfortable with trust defaults in the range of Rmb100-200mn.
(Source: 21st Century Business Herald, 31/7/2012; Caiing, 1/27)
25 Jul 2014, Rmb1.3bn borrowed by Xinbeifang & arranged by China Credit Trust
- Details: Xinbeifang is another Shanxi coal miner.
- Potential outcome: repayment may be extended.
- Reason: Xinbeifang is negotiating with an SOE to sell some of its coal mine assets.
(Source: China Securities Journal, 1/15)
27 Jul 2014, Rmb319mn borrowed by Hongsheng & arranged by Huarong Trust
- Details: Hongsheng is a Shanxi coal miner. Huarong sold another trust product for it which will mature in 4 September 2014, worth Rmb63mn.
- Potential outcome: repayment may be extended.
- Reason: Hongsheng may have assets to secure more financing. It issued these two trust products to replace another trust product that matured in Q3 2012. The owner also issued other trust products using his personal property assets as collateral and raised Rmb1.2bn.
(21st Century Business Herald, 20/12/2013)
7 Sept 2014: Rmb400mn borrowed by Zengdai & arranged by CCB Trust
- Details: 1) The proceeds of the product were invested in financial markets. 2) Its 1st tranche, worth Rmb400mn, matured in Mar 2013 with a 38% loss vs. an expected return of 20-30%. Investors agreed to extend the maturity of the product to Sept 2014. 3) Its 2nd tranche, worth Rmb359mn, matured in June 2013 with a 31% loss vs. an expected return of 20-30%. Investors agreed to extend the maturity of the 2nd tranche to Dec 2014.
- Potential outcome: The trust company and the investment company may share the losses.
- Reasons: 1) The investment company refused to repay investors in full at the original due date so the trust company may have to chip in; 2) By Jan 2014, the 1st tranche reported a narrower loss of 24%, and the 2nd tranche, also a narrower loss of 13%; 3) Zengdai may pay on behalf of its investment company for reputation’s sake.
(Source: Securities Daily, 9/7/2013; CCB Trust)
20 Nov 2014, Rmb600mn borrowed by Liansheng & arranged by China Jiangxi Int'l Trust
- Potential outcome: repayment may be extended.
- Reason: Same as the other Liansheng cases.
(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)
23 Dec2014: Rmb1.1bn borrowed by Xiaoyi Dewei & arranged by China Resources Trust
- Details: Xiaoyi Dewei is a Shanxi coal miner. The trust product originally matured in Dec 2013 but repayment was extended to Dec 2014.
- Potential outcome: Likely to default.
- Reason: Both the miner and the trust company refused to repay investors in full at the original due date. There has been no reporting on asset sales by Xiaoyi Dewei.
(Source: Financial Planning Weekly, 11 Nov 2013)
15 Jan 2015, Rmb1.2bn borrowed by Hongsheng’s owner & arranged by Minmetals Trust
- Details: the collateral is the Shanxi coal miner’s personal property assets.
- Potential outcome: May be replaced by a new trust product.
- Reason: Same as the July 2014 Rmb319mn trust product issued by Huarong Trust.
(21st Century Business Herald, 20/12/2013)
2Q/3Q 2014 – the next peak maturing period for collective trusts
We consider the trust market the most vulnerable part of the major financing channels for companies, i.e. loan, corporate bond and trust. The quality of the borrowers in the trust market tends to among the lowest. Within the trust market, collective trust products, i.e. those sold to more than one investor, tend to be risker than single trust products, i.e. those sold to a single investor. This is because investors in single trust products tend to be more substantial in resources, thus most likely more sophisticated in their risk control.
The Wind database lists close to 12,000 collective trust products, worth Rmb1.34tr, which cover roughly half of the collective trust market (Rmb2.72tr as of the end of 2013). It has reasonably good quality data series on the issuing dates and amounts raised. However, data on maturing dates are sporadic. We estimate that the average duration of the trust products is around 2 years. Based on this assumption and the issuing dates, we have mapped out a rough maturing profile of the collective trust market. As we can see from Chart 1, 2Q and 3Q this year will be the next peak maturing period for this market.