In a 2-line statement, offering very few details, ICBC's China Credit Trust Co. said it reached an agreement to restructure the CEG#1 that ha sbeen at the heart of the default concerns in recent weeks. The agreement includes a potential investment in the 3 billion-yuan ($496 million) product but didn’t identify the source of funds, or confirm whether investors would get all of their money back. The media is very excited about this entirely provisional statement and we note, as Bloomberg reports, investors in the trust product must authorize China Credit Trust to handle the transaction if they want to recoup their principal which will involve the sale of investors' rights in the trust at face value (though no mention of accrued interest). As BofAML notes, however, "the underlying problem is a corporate sector insolvency issue... there may be many more products threatening to default over time," and while this 'scare' may have raised investors' angst, S&P warns "a bailout of the trust product [leaves] Chinese authorities with a growing problem of moral hazard," and they have missed an opportunity for "instilling market discipline."
1) ICBC issues a 2 line statement on a CEG#1 restructuring - no details and no comments from anyone involved
China Credit Trust Co. said it reached an agreement to restructure a high-yield product that sparked concern over the health of the nation’s $1.67 trillion trust industry...
Beijing-based China Credit Trust’s two-line statement on its website didn’t identify the source of funds, or say whether investors would get all of their money back.
2) Investors claim they "could" be able to sell their rights to the CEG#1 trust to an "unidentified buyer" at par (though receive no accrued interest as far as is clear)
Industrial and Commercial Bank of China Ltd. told investors of a China Credit Trust product facing possible default about an offer in which they can receive back their full principal, according to an investor with direct knowledge of the offer.
Rights in the 3 billion-yuan ($496 million) product issued by China Credit Trust Co. can be sold to unidentified buyers at a price equal to the value of the principal invested, according to one investor who cited an offer presented by ICBC and asked to be identified only by his surname Chen.
China Credit Trust earlier said it reached an agreement for a potential investment and asked clients of ICBC, China's biggest bank, to contact their financial advisers.
3) “A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,”
As one analyst noted, the PBOC is running scared...
“It indicates the government still won’t tolerate any ultimate default and retail investors will continue to be compensated in similar cases.”
4) This confirms S&P's recent warning that "A bailout of the trust product would leave Chinese authorities with a growing problem of moral hazard," and an opportunity for “instilling market discipline” will have been missed.
...said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. Still, implicit guarantees distort the market and “delaying the first default means risks are snowballing,” he said.
5) of course, China may have shown its moral hazard hand on this occasion but as BofAML warns, "We suspect that, at a certain point, the involved parties will be either unwilling or unable to bail them out [again], which may trigger a credit crunch...The underlying problem is a corporate sector insolvency issue... there may be many more products threatening to default over time."
There are plenty more trust products facing maturity/default in the short-term...
The most volatile part of the system is the financial market and the weakest link of the financial market is shadow banking. Within the shadow banking sector, we believe that the trust market faces the biggest default risk because credit quality here is among the lowest. The stability of the shadow banking sector is based on public confidence and any meaningful default will chip away some of the confidence. We suspect that trust defaults by private borrowers may work on public sentiment gradually while any LGFV trust default may immediately trigger significant market volatility. 2Q & 3Q this year will be another peak trust maturing period.