18 August 2019

Corporate bond defaults could have deadly ripple effects

More companies in the alternative energy sector are on the verge of default on their bond interest payments reminiscent of cash-strapped Shanghai Chaori Solar Energy Science and Technology Co. Ltd. (002506.CN).

Chaori failed to make 89.8 million yuan (US$14.62 million) in interest payments, resulting in China’s first corporate bond default and breaking investor expectation of “guaranteed” return on fixed income products.

Baoding Tianwei Baobian Electric Co. Ltd. (600550.CN) had its bonds suspended from trading on the stock exchange after incurring losses two years in a row. The securities were issued in 2011.

On Tuesday, those bonds were banned from being used as collateral for loans and were up for delisting on Thursday. The bonds have a combined face value of 1.6 billion yuan and annual interest rate of 5.75 percent over seven years.

Baoding Tianwei, which is engaged in the new energy business, posted a 5.23 billion loss attributable to shareholders in 2013.

The Hong Kong Economic Journal’s EJ Tactics column looks at the potential impact of these developments.

The Shenzhen Stock Exchange suspends corporate bonds that have made losses for two consecutive years, breached regulations or been used for non-designated purposes.

Baoding bond yields climbed 200 basis points in the aftermath of the Chaori default. Another new energy firm, Sinovel Wind Group Co. Ltd. (601558.CN), which is indirectly controlled by Dalian’s State-owned Assets Supervision and Administration Commission (002204.CN), saw its bonds surge 300 basis points, further demonstrating the ripple effects of Chaori’s troubles.

Sinovel has about 2.8 billion yuan of outstanding bonds. After posting a 580 million yuan loss in 2012, Sinovel expects to lose 3 billion yuan for 2013.

More defaults could be on the way by companies in sectors with excess capacity such as steel and aluminum.

If the Chinese government allows more defaults, it will signal to investors that they should bear their own investment risks. This can hasten the process of eliminating excess supply in the economy.

On the flip side, it could shock the financial markets. Banks will be adversely affected given their loan exposure to these poorly performing industries.

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Freelance journalist

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