China’s first-ever default on a domestic corporate bond yesterday has sparked legal action by investors owed interest payments from a solar company, their lawyer said.
Shanghai-based Chaori Solar Energy Science & Technology Co (超日太陽能) said on Tuesday it was unable to make full bond interest payments of 89.8 million yuan (US$14.7 million). Chaori board secretary Liu Telong (劉鐵龍) confirmed yesterday that the company was in default, Dow Jones Newswires reported.
The development is being widely described as China’s first ever corporate bond default, but analysts say that it could benefit the market in the long term by raising awareness of risk and making investors more selective.
“The default today is already an established fact,” said lawyer Gan Guolong (甘國龍), who represents investors. “We will definitely help recover bond holders’ interests through relevant legal action.”
Investors had already asked the Higher Court of Guangdong Province to order payment from the company, its listing exchange and the lead underwriter for the bond’s initial issue in 2012, he said, but the case was still pending. Chaori lists shares and bonds on the Shenzhen exchange in Guangdong.
A commentary issued by China’s Xinhua news agency on Thursday suggested that the Chinese government could send a signal by allowing the company to default.
“The episode should help reduce the moral hazard caused by the widespread assumption that an almighty government will always bail out underwater investments with taxpayers’ money,” the commentary said.
“That, after all, is the market playing its own decisive role,” it said, using a catchphrase for economic reforms pledged at a key Chinese Communist Party meeting last year.
Investors said representatives had also asked the district government in Shanghai, where the firm is located, and the China Securities Regulatory Commission market watchdog to act.
Analysts said bond buyers, who are largely retail investors in China, would be hurt, but a default would have a positive impact on the country’s corporate debt market.
“Municipal governments and banks in China have stepped in to help distressed companies meet their bond payment obligations during the past few years,” ratings agency Moody’s said in a report yesterday. “These bailouts have led some investors to overlook the fundamental credit risks in bonds.”
Trouble in China’s solar sector, which has been plagued by falling prices for cells and panels as well as production over-capacity, came to the forefront last year with the collapse of Suntech Power Holdings Co (尚德太陽能), which led China’s commerce minister yesterday to warn industries and companies not to over-expand.
Suntech Power, once the world’s biggest maker of solar cells and panels, sought market share by driving down prices to levels some competitors claim were loss-making. However, its main Chinese unit, Wuxi Suntech Power Co (無錫尚德), filed for bankruptcy in March last year with debts of hundreds of millions of dollars.
“What we should take into account is that some industries should not develop overly fast, particularly expand blindly,” Chinese Commerce Minister Gao Hucheng (高虎城) told reporters.
“They should not either rely on the foreign market for the majority of their product sales,” he added.