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Chinese state-owned coal miner Yongcheng Coal and Electricity Holding Group Co. Ltd. dodged a bullet and avoided triggering cross-defaults on billions of debt as creditors agreed to a proposal for extension on a 1 billion yuan ($152.4 million) of bonds that were due November 10.
At a meeting hosted by China Everbright Bank and Zhongyuan Bank on Monday night, the leading underwriter of the bonds, Yongcheng Coal bondholders unanimously agreed to accept a 50 per cent payment of principal and to extend the balance of principal and interest by 270 days, according to a statement released on Tuesday by Shanghai Clearing House.
The extension will avoid triggering cross-protection clauses on 15 billion yuan of Yongcheng Coal bonds and 11.5 billion yuan of debt issued by its parent company, Henan Energy and Chemical Industry Group Co. Ltd.
According to public records, 25 outstanding bonds issued by Yongcheng Coal and Henan Energy and Chemical, will also be deemed to be in default if they miss payments on any other bonds. So-called cross-defaults, where a default on one bond triggers another, can only be avoided if payments are made — or extension agreements reached with creditors — within 10 working days.
Henan Energy went on an acquisition spree in the early 2000s that gave the company a spot in the Fortune 500 list. But the resulting collection of lossmaking businesses ultimately dragged the company’s finances down.
Some of the 180,000 workers at Yongcheng say they have not been paid for months, highlighting the pressures building on local officials across the country as they grapple with bond defaults by state-owned enterprises.
Yongcheng Coal is based in Henan, China’s third most populous province with almost 100m people and an industrial powerhouse with a gross domestic product as large as Turkey’s. Its parent was once one of the country’s leading energy conglomerates, thanks to its ample reserves of high-grade anthracite coal.
The Henan government has dispatched a crisis management team to Yongcheng Coal’s headquarters, but their room for manoeuvre has been restricted by the province’s own financial pressures. In a statement last month, Henan’s finance bureau said the province faced a “severe situation” as fiscal expenditures exceeded government income.
The defaults by Yongcheng, state-owned automaker Brilliance and a chipmaker backed by Tsinghua University have shaken local markets and caught bondholders off guard.
Regulators have said they are investigating securities companies and banks for possible wrongdoing in connection with Yongcheng Coal’s default. On Sunday the financial development and stability committee, headed by Mr Liu, said there would be “zero tolerance” of any irregularities or misleading disclosures.
Speaking at a meeting for the committee that oversees China’s financial sector over the weekend, vice premier Liu He said authorities would “severely” crack down on wrongdoings on bond financing, ranging from “malicious” transfer of assets to misuse of funds.
The recent missed payments have shattered the widely held belief among Chinese bond investors that state-backed companies enjoyed an implicit guarantee from the local government, regardless of their financial health.
As a result, many state-owned companies have suspended bond issuance and many more defaults could follow as these groups rely on issuing new bonds to pay off the old ones.