Construction Firm Joins Public Debt Default Queue
Yet another firm is teetering on the brink of default for a relatively large bond, joining a small but growing list of such companies as Chinese investors learn about the risk of buying debt from shaky companies in struggling industries. This time it’s a little-know construction company called Huatong Road & Bridge Group that’s warning it could soon default on interest and principal payments for 400 million yuan ($65 million) in bonds set to mature later this month. The announcement is the latest of a slow but steady trickle of similar news that hints at distress due to China’s slowing economy.
The bigger question going forward will be which companies and industries stand the biggest risk of defaults, and whether domestic or international investors will be hurt the most. Most of the sectors I regularly write about, including tech and finance, are likely to avoid many default problems since many are cash-rich and enjoy strong government support.
But groups suffering from overcapacity and in overheated sectors like real estate look far more vulnerable. And then, of course, there are always the companies that are simply poorly managed in any sector, which could default at any time. Such companies would never attract investor money in western markets. But in China they can often raise cash from unsophisticated buyers who believe the government will always rescue any company from defaulting.
According to the latest headlines, Huatong has warned that it may be unable to repay a one-year bond and its interest when the notes come due on July 23. (English article) It blamed the problem on an ongoing investigation of its CEO, though it’s not really clear if that probe is the source of the problem or whether the probe was launched due to the company’s shaky financial position.
Some reports are pointing out that this would be only the second default on a yuan-denominated bond in modern Chinese history, following a landmark default earlier this year by solar panel maker Chaori (Shenzhen: 002506). (previous post) But it’s worth noting that there have been a number of other key defaults in other forms of public debt, reflecting the struggles that certain companies and industries are facing.
Just 3 weeks ago, timber company China Forestry (HKEx: 930) missed an interest payment on dollar-denominated bonds it had issued to international investors, as it tried to negotiate an early redemption of the notes. (previous post) In 2 other cases, high-yield yuan-denominated investment products backed by debt from failed coal mining companies in Shanxi province also defaulted.
Last but not least, 2 of China’s former solar panel powerhouses, Suntech and LDK, ultimately became insolvent due to their heavy debt loads and ended up defaulting on hundreds of millions of dollars in dollar-denominated bonds. Based on all these examples, we can see that solar, construction and energy might all be areas to avoid for risk-averse investors in the next few years. So far I have yet to hear about any potential defaults in tech or finance, since most companies that have issued public debt in those sectors are relatively cash rich.
In this latest case of Huatong, we’ll have to watch and see if a state-run body comes to the rescue and repays the debt holders. That was what reportedly happened in the Chaori case, and an unnamed state-run entity also reportedly came to the rescue in at least one of the high-yield investment product defaults.
I wouldn’t be surprised if Huatong bondholders receive a similar rescue, though I doubt such packages will come indefinitely for yuan-denominated products. As to foreign debt issued by Chinese companies, most of it denominated in dollars, international investors will need to do their homework before investing since no bailouts from Beijing are likely in this area.
Bottom line: Beijing is likely to rescue bondholders of construction company Huatong, which is set to default on 400 million yuan worth of bonds coming due next week.
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