Date
25 May 2017
Dongbei’s bond default may involve up to about 9 billion yuan of debt, including several other issues that will mature in the next few years. Photo: Reuters
Dongbei’s bond default may involve up to about 9 billion yuan of debt, including several other issues that will mature in the next few years. Photo: Reuters

Signs of change in local govt attitude toward ailing SOEs

China has little experience in dealing with default and bankruptcy cases involving state-owned firms, other than propping up ailing companies. But change seems to be in the air.

Dongbei Special Steel, based in northeastern China’s Liaoning province, failed to repay holders of seven of its bond issues worth several billion yuan.

Bond investors were pushing to kick-start the bankruptcy process in the hope of recouping whatever they can but the steel maker refused to suspend operations, China Commercial Daily reports.

Investors then tried to exert pressure on the biggest shareholder, the State-owned Assets Supervision and Administration Commission (SASAC) of the Liaoning provincial government, which holds 46 percent of Dongbei Special Steel.

The Lianoning SASAC then drafted a plan to resolve the problem, asking the lead underwriters of the bonds to lend the firm money for repayment to investors, a Caxin report said.

Without proper consultation with lead underwriters, the plan is unlikely to work.

The steel firm only has itself to blame for its debt woes. It overinvested in the past with borrowed money, and is now left with excess capacity in a weak market.

Liaoning has enough problems of its own. With a weak economy and poor economic structure skewed towards resources and other old-economy industries, and a debt load that has already snowballed to over 1 trillion yuan (US$149 billion), there is not much it can do.

Seeking a settlement with investors on behalf of Dongbei Special Steel looks out of the question.

The Liaoning government may simply want no part in it and prefer to leave it to the market to sort out the problem.

This shows that local authorities are increasingly determined to clean up unfit state-owned firms and dispel the long-held assumption that state-owned firms won’t be allowed to fold.

The bond market is likely to react by being more selective, and pay more attention to the underlying creditworthiness of a borrower rather than relying on potentially flimsy support from the owners, whoever they may be.

Yet the general yield level of the market is unlikely to be affected much, given the prevailing low interest rate environment and investors’ hunger for yield.

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CG

EJ Insight writer

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