UPDATED: China’s debt woes continue after surprise defaults by high-profile state-owned firms roiled bond market

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China’s debt woes are continuing this week after a series of surprise bond defaults by high-profile state-owned firms has knocked investors’ confidence and roiled China’s credit bond market.

Brilliance Automotive Holdings, the Chinese joint venture partner of BMW, said in a filing that its parent Huachen Automotive Group may undergo restructuring after a creditor filed an application to a Chinese court.

Huachen, owned by the government of northeastern China’s Liaoning province, defaulted on a 1-billion-yuan bond last month, joining a growing number of delinquent state enterprises.

Huachen faces the prospect of restructuring after Gezhi Automobile Technology Co filed an application to the Shenyang Intermediate People’s Court for restructuring of Huachen, Hong Kong-listed Brilliance Auto said in an exchange filing. It’s uncertain whether the restructuring application will be accepted by the court, it said.

Bondholders see a bankruptcy restructuring by Huachen to be unfavourable as they will likely end up getting little out of the process.

Huachen said in a filing on Monday that it has defaulted on a total of 6.5 billion yuan worth of bonds and missed payment of 144 million yuan of interest.

Also on Monday, a top domestic credit rating agency downgraded nearly $1.5 billion worth of corporate bonds issued by a unit of China’s largest private aluminum smelter, an early sign of trouble as its parent faces a mountain of debt set to come due.

The downgrade comes after a short-term borrowing splurge by the parent company, China Hongqiao Group, has left it with more than 21 billion yuan ($3.18 billion) in notes and bonds to pay off by June 2021 — 1,300 per cent more than matured in the year to June 2020.

China Lianhe Credit Rating Co Ltd. downgraded the ratings of two bonds issued by Hongqiao subsidiary Shandong Weiqiao Aluminum and Power Co. Ltd. from its highest rating of AAA to its second highest, AA+, citing mounting debt pressure and coronavirus uncertainty, as well as sluggish aluminum prices and weakened demand for aluminum alloy products in the first half of the year.

In addition, CMIG Leasing Group, a unit wholly owned by the China Minsheng Investment Group (CMIG), one of the country’s largest private investment firms, reportedly failed to fulfil its obligations to repurchase 832 million yuan worth of bonds that mature on Monday, according to Chinese business newspaper The 21st Century Business Herald.

CMIG’s debt repayment difficulties became apparent after it missed payment on an onshore bond in January last year. The default by the Shanghai-based conglomerate shocked investors as it’s one of the biggest private investment conglomerates which are thought to have more access to funding than average companies.

Also on Monday, state-backed integrated circuit maker Tsinghua Unigroup Ltd defaulted on 1.3 billion yuan of three-year privately issued notes that mature on the day, according to several industry sources. The default comes after Unigroup failed to gain bondholders’ support for its proposal to extend repayment deadline.

On Tuesday, Unigroup’s credit rating was slashed to BBB from AA on Monday by China Chengxin International Credit Rating Co. The rating agency said the event could trigger cross-defaults, potentially strangling its funding and squeezing its liquidity.

Last Tuesday, trading in bonds issued by Unigroup was halted on the Shanghai Stock Exchange after a debt warning by one of China’s leading rating agencies prompted a selloff. The company’s’s bonds plunged after China Chengxin International Credit Rating Co Ltd (CCXI) said on Nov. 5 that it may downgrade the circuit maker’s AAA rating after it said it would not exercise its option to redeem a perpetual bond.

The latest development this week comes after Yongcheng Coal & Electricity Holding Group Co. defaulted on 1 billion yuan worth of bonds last Tuesday, a high-profile default that shock investors. The state-owned coal miner had just raised an equivalent amount by selling commercial paper, and carried a triple-A credit rating by China Chengxin International Credit Rating, although these top grades are far more common in China than in international markets.

That default was just the tip of its debt iceberg. Aside from the default, the company has an additional 12 billion yuan of bonds set to mature by the end of the year. Its parent Henan Energy and Chemical Industry Group Co. Ltd., the largest state-owned company by assets in central China’s Henan province, has 22.9 billion yuan of notes set to mature by the end of this year. Its total debts as of midyear were 10 times that.

“The recent round of bond defaults were mostly by high-profile enterprises owned by Chinese local governments, which caused investors’ concerns over bonds issued by other state-backed companies, ” said a bond investment professional.

“The latest default cases have further undermined people’s faith,” in state-owned enterprises, analysts at CSC Financial Co. wrote in a note to clients Monday. The CSC team said that “predefault asset transfer” and failures to repay bondholders despite big reported cash positions were also problematic.

Ivan Chung, associate managing director, corporate finance, at Moody’s in Hong Kong, said the defaults reflected tightening financial conditions as China pares back economic stimulus measures introduced during lockdowns.

According to data from Wind Information, as of November 16, a total of 52 bond issuers have defaulted on 136 bonds this year, involving 109.4 billion yuan.