A Chinese building materials producer will avert default on a bond interest payment after the guarantor for the securities said it would step in to help, according to two people familiar with the matter.
Closely held Xuzhou Zhongsen Tonghao New Board Co (徐州中森通浩新型板材), based in the eastern province of Jiangsu, missed a 10 percent coupon payment due on Friday on the securities, the two people said, asking not to be identified because the details are private.
Sino-Capital Guaranty Trust Co (中海信達擔保), the guarantor for the 180 million yuan (US$29 million) of notes, will fulfill its responsibilities, the two people said.
Any default by Xuzhou Zhongsen would have been the first in the nation’s private-placement market for high-yield bonds from small and medium-sized enterprises (SME) unveiled in 2012, Pengyang Investment Management Co (鵬陽投資管理) general manager Yang Aibin (楊愛斌) said.
China’s onshore bond market saw its first default last month when Shanghai Chaori Solar Energy Science & Technology Co (超日太陽能) missed payment on its debt.
“There will continue to be a mixture of bond defaults and too-big-to-fail, or too-entangled, cases,” said James Zhao, chief investment officer in Beijing at the international department of CCB Principal Asset Management Co (建信基金管理).
“It’s now up to the market to find the pattern and investors will now have to figure out who is creditworthy and who is more likely to fail. It’s a positive development,” Zhao said.
Xuzhou Zhongsen’s missed coupon payment was first reported on Tuesday in the 21st Century Business Herald newspaper.
Mounting nonpayments amid an economic slowdown in China may signal the government has backed off from its practice of bailing out companies with bad debt.
Chinese Premier Li Keqiang (李克強) said last month at the conclusion of an annual legislative gathering that defaults in some financial products may be unavoidable as authorities tighten credit.
China started its private junk bond market in June 2012 to give small companies a way of raising funds outside the network of so-called shadow banks.
Smaller companies seeking to sell debt as part of the trial program would not have to meet net asset or profit requirements, the Shanghai and Shenzhen stock exchanges said in May 2012.
Concerns have increased that defaults may spread as the world’s second-largest economy cools. Policy makers have set a 7.5 percent growth target for this year, which would be the slowest since 1990.
“There is a high probability that credit risk will increase this year as macro-economic conditions weaken,” said Li Lei (李磊), an analyst in Beijing at China Minzu Securities Co (中國民族證券) said in an e-mail on Tuesday.
“Defaults among some small companies can be regarded as a necessary and healthy stage of development in the onshore bond market,” Li said.
The number of Chinese companies whose debt is double their equity has surged since the global financial crisis, suggesting more defaults may come, data compiled by Bloomberg show.
Publicly traded non-financial corporates with debt-to-equity ratios exceeding 200 percent have jumped 57 percent since 2007.
“SME private bonds are now facing relatively high risk,” Yang said. “We expect more defaults to come in this area, especially those private enterprises without guarantees.”