Mainland construction firm warns of possible bond default

Huatong Road & Bridge's failure to pay would be mainland's first such publicly announced default

PUBLISHED : Thursday, 17 July, 2014, 1:22am
UPDATED : Thursday, 17 July, 2014, 5:05am

Mainland construction firm Huatong Road & Bridge said yesterday it might fail to pay investors both interest and principal due on a one-year short-term bill issue that matures next Wednesday.

In a statement published on the website of the official Shanghai Clearing House after the market closed, unlisted Huatong warned that payments of both interest and principal on the issue were uncertain because its chairman was currently "assisting an official investigation".

If Huatong fails to pay, it would be the first such publicly announced default in the mainland's interbank market, its largest bond market. It would also be the first time a mainland company has publicly defaulted on both interest and principal due on a bond.

The mainland's first publicly known default was in March when Shanghai Chaori Solar Energy Science & Technology did not make 89 million yuan (HK$111 million) in interest payments due on a bond traded on the Shenzhen exchange, a far smaller venue serving retail investors.

But that default startled many would-be bond issuers and caused them to put plans on hold as yields on riskier issuances rose in reaction. At the same time, bond investors began moving funds into bonds perceived as protected by implicit government guarantees.

Huatong, based in Shanxi province, issued 400 million yuan in one-year short-term bills in July last year. The company had total assets of 11.1 billion yuan at the end of last year.

Its business is focused in the construction and real estate industries, both of which have suffered as housing prices have declined on the mainland and infrastructure spending has slowed.

The bond has a coupon rate of 7.3 per cent. The issue was led by China Guangfa Bank and Guotai Junan Securities.

After Huatong's statement, China Lianhe Credit Rating announced it had downgraded the company's credit rating to BB-plus from AA-minus with negative bias, and the bond's rating to B from A-1.

Credit metrics for many mainland firms have been steadily worsening, in particular those exposed to real estate.

In April, Bloomberg reported the central government was investigating some companies' use of bond proceeds, as concerns mounted that defaults might increase in the mainland's US$4.2 trillion onshore debt market.

The National Development and Reform Commission, the mainland's top planning agency, began conducting a nationwide special inspection of the corporate bonds under its supervision in March, it cited two sources as saying. Most new note issues regulated by the NDRC are sold by local-government financing vehicles.

Local-government financing vehicles, a means by which provinces and regions raise funds, must repay 352.6 billion yuan of debt this year, according to Everbright Securities, the most since the firm began compiling data in 2000.