Ever since Beijing allowed private Chinese companies (even certain state-owned enterprises) to officially fail for the first time in 2015, and file for bankruptcy to restructure their unsustainable debt loads, it's been a one-way street of corporate bankruptcies, one which we profiled last June in "Is It Time To Start Worrying About China's Debt Default Avalanche" (the answer, by the way, was yes), and which culminated with a record number of Chinese onshore bond defaults in 2018, as a liquidity crunch sparked a record 119.6 billion yuan in defaults on local Chinese debt last year.
But if 2018 was bad, 2019 is set to be the biggest by far for defaults in China’s $13 trillion bond market, highlighting the widening fallout from the government’s campaign to rein in leverage and China's accelerating economic slowdown. According to Bloomberg, in just the first four months of the year, companies defaulted on 39.2 billion yuan ($5.8 billion) of domestic bonds, some 3.4 times the total for the same period of 2018. The pace is also more than triple that of 2016, when defaults were more concentrated in the first half of the year, unlike 2018.
However, whereas for much of 2018 Chinese defaults affected largely less meaningful companies with little to no systemic impact, in 2019 the defaults started hitting dangerously close to the beating heart of China's massive, $40 trillion financial system (roughly three times China's GDP). As we reported back in February, a giant Chinese borrower missed its payment deadline when Wintime Energy - which in 2018 became the latest Chinese bond defaulter as the coal miner failed to pay scheduled interest - didn’t honor part of a restructured debt repayment plan, setting the scene for even more corporate defaults, and as Bloomberg put it, "underscoring the risks piling up in a credit market that’s witnessing the most company failures on record."
Then, at the start of April, China's default tsunami appeared set to claim its biggest and most visible casualty yet as a debt crisis at one of China’s most well-known private conglomerates entered a new stage, when the company said cross-default clauses had been triggered on dollar bonds worth $800 million.
The company in question, China Minsheng Investment Group, was called "China's JPMorgan" by Dong Wenbiao, known as the “godfather’’ of the nation’s private sector. CMIG’s investments, spanning health care to aviation, were predicated on funding obtained in part through shadow banking, and it’s become a surprise casualty of China’s deleveraging drive; it is one of the largest private investment conglomerates in China, and had 232 billion yuan in total debt and 310 billion yuan of assets as of June 2018, according to Shanghai Brilliance Credit Ratings.
The Shanghai-based company shocked bondholders by missing a payment in late January. While it was able to scrape enough cash together by selling land interests to repay the note on Feb. 14, in April we reported that its dollar bonds were put under default after an affiliate missed payments. CMIG also defaulted on a domestic bond due late April although it made good on the payment two days late.
China Minsheng, which has become a case study in how China will resolve potentially systematic defaults, reduced 43 billion yuan of interest-bearing debt since the start of 2018 and it’s trying to resolve its liquidity crisis via debt workout and business reorganization.
And now, in the latest unorthodox "restructuring" attempt, Reuters reports that China Minsheng is raising funds from its employees as it seeks to combat the liquidity squeeze that has sent the company to the verge of bankruptcy. The Chinese equivalent of a GoFundMe campaign for one of China's largest investment has been set up in the form of a "funding pool" for the fundraising. To avoid the bankruptcy of their employer, all of CMIG’s employees in its headquarters can put their own money into the pool and choose between buying CMIG’s debt or equity, said the representative.
As we reported last month, the debt-laden conglomerate - which was founded in 2014, and was once among China’s most high-profile and acquisitive private companies domestically and globally with businesses that span leasing, new energy, airlines, construction and investment - had missed payment and formed an emergency committee to deal with its liquidity troubles, raising investors’ fears about financing pressures on China’s overall private sector.
According to Refinitiv data, CMIG has 12 outstanding yuan bonds worth 29.75 billion yuan ($4.37 billion). It has also issued bonds worth $800 million through Boom Up Investments Ltd, a subsidiary domiciled in the British Virgin Islands; these traded down to 55 cents on the dollar late April before posting a very modest rebound.
Though it may come as a surprise to some, this is not the first time for a Chinese private company to raise money from its employees. Indebted conglomerate HNA Group, which two years ago fell from grace with Beijing after a historic acquisition spree around the globe, also sold investment products to staff but later missed some repayments under financial pressure.
Following the biggest-ever year for onshore defaults in 2018, Chinese corporate issuers again face a wall of bond maturities and more companies than ever are missing payments, raising risks for investors in the world’s third-largest bond market. Bonds from at least 44 Chinese companies totaling $43.7 billion face imminent repayment pressure. Looking further out, it gets even worse, as China's corporate bond maturity schedule is staggering with trillions in bonds set to mature in coming quarters, assuring even more defaults to come.
"Short bond tenors mean the companies need to refinance frequently,” and weaker ones will likely have difficulty, analysts including Hong Kong-based Nino Siu at Moody’s Investors Service wrote in a note last month. “Banks are reluctant to lend to weaker companies. Additionally, shadow banking, on which weaker Chinese companies rely, continues to contract as the government tightens regulation,” she and her colleagues wrote.
Whether Minsheng employees' "gofundme" campaign is successful in averting bankruptcy remains to be seen, but one thing is certain: Chinese issuers have already defaulted on bonds with a principal amount of 40 billion yuan in just the first four months of 2019, up 3.4 times the total for the same period of 2018. The trend is clear: unless something changes, 2019 will be the new high, and sooner or later a company will default that will be the tipping point for a debt tsunami that finally drags down China's gargantuan financial sector.