News that Shanghai Chaori Energy Science and Technology was set to miss a coupon payment tomorrow had severely hit the market, Chuanzhong said.
Two other companies have postponed debt offerings since Chaori warned it could not make the payment, blaming market volatility.
The delays underline the risk that an unprecedented default will make it harder for other companies to access capital, in a potential blow to China’s economic growth.
Chuanzhong originally planned to offer the bonds from today until March 14. The seven-year fixed-rate bond was priced to yield 8.3%, equal to a spread of 3.3% over the current one-year Shibor rate. Pengyuan has rated the bond AA and the issuer AA-.
Yields on corporate and enterprise bonds shot up yesterday after Chaori said it would miss its coupon payment on Friday.
The yield on five-year AA rated notes rose 8bp to 7.77% yesterday, the biggest increase since November 15, according to ChinaBond data.
Chuanzhong is not the only victim. Due to the severe market volatility, Taizhou Kouan Shipbuilding postponed its issuance of Rmb300m of short-term commercial papers, while Xining Special Steel cancelled a Rmb470m offering of medium-term notes.
Chaori will become the first Chinese company to default on a domestic bond if it fails to make Friday’s coupon payment in full. On Tuesday night, Chaori said it could pay only Rmb4m of the Rmb89.8m of interest due on the bond.
The shortfall in payment is due to a liquidity crisis the company has not resolved, Chaori said in an announcement. The company also said it had failed to secure enough funds from external sources to cover the loss.
The five-year Rmb1bn corporate bond was issued on March 7 2012 with a fixed coupon of 8.98% via China Securities. The issuer and the bond received AA ratings from Pengyuan. On May 18 2013, Pengyuan downgraded the ratings to CCC.
Market participants reckon Chaori’s landmark default would be a positive step for China’s domestic bond markets in the long term. Standard & Poor’s estimated China’s corporate debt market to be US$12trn in size at the end of 2013.
