China Faces Second Bond Default Amid World’s Biggest Debt
By Bloomberg News Jul 17, 2014 3:10 PM GMT+0700

China faces what would be the second default in the nation’s onshore bond market after a builder said it may fail to make a payment next week, the latest sign of stress in the world’s biggest corporate debtload.

Huatong Road & Bridge Group Co., 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. Chairman Wang Guorui is assisting authorities with an official investigation, it said, without elaborating. 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.

Shanghai Chaori Solar Energy Science & Technology Co. (002506) marked China’s first onshore corporate bond default in March when it missed a coupon payment. Huatong Road would be the first to fail to pay both interest and principal, and would also be the first default in the interbank note market, the nation’s biggest bond bourse. Chinese firms have the most debt globally after increasing borrowings to $14.2 trillion as of Dec. 31, surpassing the U.S.’s $13.1 trillion, Standard & Poor’s said in a June 15 report.

“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.”

Debt Due

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.

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.

“The central bank, which regulates the interbank market, may permit defaults to help develop the corporate bond market by lowering moral hazards,” said Li Ning, a bond analyst in Shanghai at Haitong Securities Co., the nation’s second-largest brokerage.

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.

Overcapacity

“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.”

Companies in China are facing tougher operating conditions as growth looks set to cool to 7.4 percent this year, the slowest in more than two decades, according to a median estimate of economists surveyed by Bloomberg. The March implosion of closely held developer Zhejiang Xingrun Real Estate Co. also fueled concern that defaults could spread, particularly among companies connected to the cooling property market.

‘More Defaults’

“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.

Huatong Road’s businesses include bridge and highway construction, real estate, coal, eco-friendly construction materials and agriculture-related projects, according to its website.

The Huatong and Chaori cases add to speculation that the world’s second-biggest economy is moving more toward a system in which troubled borrowers can no longer count on government help to pay off debts.

“More defaults will come,” said Haitong Securities’ Li.