The bonds of 11 Chinese companies now yield more than 15 percent as investors brace for the nation’s second onshore default amid record maturities in the coming quarter.
Companies in Asia’s largest economy need to repay 1.5 trillion yuan (US$242 billion) of local currency notes in the period to June 30, the most for a quarter in Bloomberg data going back to 1998. The yield on Cloud Live Technology Group Co’s (中科雲網科技集團) 2017 debt jumped 157 basis points to 17.9 percent since the Beijing-based Internet company said on March 4 its ability to meet debt obligations next month face “big uncertainties.”
Political, economic and regulatory factors are converging to make defaults more likely. Chinese Premier Li Keqiang (李克強) told parliament this month he is prepared to tolerate individual cases of “financial risk,” growth is the slowest in more than two decades, an anti-graft campaign is halting projects and authorities are limiting investors’ scope to buy riskier bonds.
“Conditions for a second bond default are becoming more ripe,” said Li Ning, a bond analyst in Shanghai at Haitong Securities Co (海通證券). “Given the huge amount of redemptions, China’s bond market has a high credit risk in the second quarter.”
Investors did not lose a cent in China’s only onshore bond default to date. Shanghai Chaori Solar Energy Science & Technology Co (超日太陽能), which failed to make a full coupon payment in March last year, repaid all the principal and interest for its 1 billion yuan of bonds on Dec. 22.
“The economic slowdown has put pressure on Chinese companies, especially non-state-owned companies, which get less support from the government,” said Liu Dongliang (劉棟樑), a senior analyst at China Merchants Bank Co (招商銀行) in Shanghai. The “probability of a second default is rising.”
Cloud Live, which last year changed its business focus from restaurant chains to Internet data, said on March 4 investors had applied to sell back 398.71 million yuan of its bonds on April 5. The company had 10.39 million yuan in a special account for the repayment as of today, the bond’s lead underwriter GF Securities Co (廣發證券) said on Wednesday last week.
The Beijing branch of the China Securities Regulatory Commission has urged Cloud Live to tackle its repayment situation, a company statement on Wednesday said. The commission said Cloud Live should tell its biggest shareholder, which filings show is former chairman Meng Kai (孟凱), to come back to the country to solve the issue.
Meng went abroad in early October to raise money for note repayments and seek potential investors, according to a Dec. 2 company filing. There has not been an update on his whereabouts.
“There will be more credit events in 2015 and we may see a real default that results in losses for bondholders,” said Zhang Yingjie, a Beijing-based deputy general manager in the research department of China Chengxin International Credit Rating Co (中誠信國際評級有限公司), Moody’s Investors Service’s local joint venture. “If there’s no real default, the market’s perception of risk and return will be seriously distorted.”
China has claimed a breakthrough in developing homegrown chipmaking equipment, an important step in overcoming US sanctions designed to thwart Beijing’s semiconductor goals. State-linked organizations are advised to use a new laser-based immersion lithography machine with a resolution of 65 nanometers or better, the Chinese Ministry of Industry and Information Technology (MIIT) said in an announcement this month. Although the note does not specify the supplier, the spec marks a significant step up from the previous most advanced indigenous equipment — developed by Shanghai Micro Electronics Equipment Group Co (SMEE, 上海微電子) — which stood at about 90 nanometers. MIIT’s claimed advances last
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