Sinosteel bond investors hope for bailout as default looms
A major Chinese state-owned miner and steel trader is poised to default on its bonds this week, the latest test of whether Beijing is willing to impose market discipline on national champion companies.
As China’s economy heads for its slowest growth in a quarter of a century, defaults are rising, especially in industries afflicted by excess capacity and falling commodity prices.
China last month announced a plan to raise efficiency at state groups, which dominate backbone sectors of the economy such as energy, telecommunications and heavy industry but lag behind privately owned rivals in profitability. But the plan focuses mainly on strengthening SOEs rather than shuttering or privatising those that underperform.
Sinosteel, one of an elite club of 112 state groups directly owned by the central government, sent a letter to investors last week warning that its subsidiary lacked the funds to repay principal and interest on Rmb2bn ($315m) in bonds sold in 2010 due on Tuesday.
“The company’s business has stagnated and cash flow has dried up at headquarters and a portion of subsidiary enterprises,” said the letter, a copy of which circulated on social media on Friday.
Sinosteel was not available for comment. A person who answered the phone at Sinosteel refused to transfer calls to the company’s media relations department.
Sinosteel imports iron ore for many of the country’s steel mills. It originated as a simple trading company but expanded aggressively in recent years, buying into both domestic steel mills and mining projects from Africa to Australia. Falling prices for steel and iron ore amid a slowdown in Chinese construction activity has hurt business.
China’s leadership is reluctant to tolerate public defaults due to fears about financial instability. Sinosteel investors are hoping that the government or another state entity will step in with a last-minute bailout. Last month state-owned heavy machinery producer China National Erzhong Group narrowly averted default when its parent company said it would buy outstanding bonds from investors.
“The company has lost debt repayment ability. It can only rely on external support,” Jiang Chao, Haitong Securities bond analyst, wrote last week.
While bailouts prevent short-term instability, analysts warn that they promote moral hazard and misallocation of capital. Investors who believe that the government will not permit defaults have less incentive to examine company fundamentals when choosing bonds.
Chaori Solar became China’s first domestic bond default in March 2014 when it missed a Rmb90m interest payment. But later that year Chaori bondholders were bailed out when a state-owned bad-loan bank, Great Wall Asset Management, stepped in.
In April, Baoding Tianwei Group, which makes power transformers, defaulted on Rmb86m in bond interest, becoming the first state-owned company to default when it missed a Rmb86m interest payment. But local media reported days later that China Construction Bank, which underwrote Tianwei’s bonds, had provided a loan to allow bondholders to be repaid.