Since Shanghai Chaori Solar Energy Science and Technology became the first Chinese issuer to default on a public domestic bond earlier this month, yields on the riskiest securities have soared and investors have shifted to safer state-backed assets.
As of March 14, four bonds were trading at yields over 20%, up from just one at the end of February, before Chaori said it would miss its coupon payment. In a recent report, CICC produced a watch list of 24 bonds from 19 issuers that recorded losses in 2012 and most of 2013. Trading in some of these bonds has already been suspended.
“As March and April are the annual performance reporting season, it is very likely the financial problems of issuers get exposed,” said a trader.
Chaori’s unprecedented default signalled to the market that local governments would no longer bail out troubled firms, forcing market participants to reassess credit risk throughout China’s domestic markets.
Some analysts suggested bonds from companies in sectors facing excess capacity, such as solar energy, iron and steel and shipping, should get more attention.
As a result, China’s domestic traders are scouring financial statements and have started to shun bonds they deem most likely to default.
At the end of February, only one bond traded at a yield high enough to reflect the risk of default: Sinovel 2011-01 was quoted to yield 22.30% at the time.
As of March 14, Sinovel 2011-01’s yield had surged to 29.61%. Zhuhai Zhong Fu 2012-01 joined its ranks yielding 27.45%, while ZhongFu Industrial 2011 was yielding 20.41% and Xiang E Qing 2011 was yielding 21.82%.
At the same time, investors have shifted to safe-haven bonds from state-owned enterprises and other municipal-supported bonds, according to one trader. Yields on SOE Beijing Energy’s 2012-01s narrowed to 5.25% on March 14 from 5.48% at the end of February.
High yields may not tell the full story, since trading in a bond is usually stopped after a company posts losses for two consecutive years. Chaori’s bonds have not traded for seven months.
Baoding Tianwei Baobian Electric’s Rmb1.6bn 5.75% 2018 notes, for instance, were suspended after it published its annual report on March 11. The electrical equipment and solar cell maker has said it will make a July 11 coupon payment, but there are worries about the company’s ability to meet its financial obligations. Tianwei’s 2018s were last quoted at 82.19 to yield 15.34%, according to Thomson Reuters data.
Growing inventory
CICC’s watch-list features bonds from Zhongfu Enterprise, Jiangxi LDK Solar, Rongsheng Heavy Industries, Hisor Pharmaceutical, Yingli Green Energy, XiangEQing, Sanan Optoelectrics, Silver Base Group, Guangzhou Donghua Enterprise and China National ErZhong Group. CICC analysts added that the list did not include many other smaller issues also at risk of defaulting.
Jiangxi LDK Solar’s parent, NYSE-listed LDK Solar, appointed provisional liquidators in February after defaulting on offshore debt and convertible bonds, but said it had no plans to restructure its Chinese business.
JLDK has Rmb500m in medium-term notes due December 8 2014. Shanghai Brilliance downgraded JLDK and its MTNs to B+ from BBB+ with a negative outlook in September 2013, noting that, as at end-June, the company’s assets of Rmb21.8bn were lower than its debts of Rmb22.2bn.
Haitong Securities said Nanjing Iron and Steel’s Rmb4bn 5.8% bond should join this list because of the company’s continuing losses.
Not only bonds
While analysts agree that further defaults are inevitable, spotting the next one will not be easy. There are about 500 relatively small or private sector bond issues outstanding in the onshore corporate market. These include corporate bonds, enterprise bonds, MTNs and commercial paper.
Trouble may also crop up in related financial markets, as some weaker companies have turned to bank loans and trust products for financing, instead of the domestic bond markets.
According to Citic Securities, there are 7,966 trust products totalling about Rmb1trn, including interest payments, due this year. About Rmb248bn of these trusts were created to finance property companies, where slowing property sales have raised fears of a funding crisis.
State media reported earlier this week that Zhejiang Xingrun Real Estate, a small developer in Zhejiang Province, was unable to meet its Rmb3.5bn debt load.
As the possibility of default has become a reality, market players will have a lot to keep their eyes on.
