Trust defaults seen as coal miners run into trouble
The number of trust products tied to the mainland's flagging coal miners maturing this year are set to almost quadruple, as rising borrowing costs for the industry make it harder to avoid defaults.
The number of redemptions of such products sold to multiple investors will jump to 19 this year from five in 2013, according to Cnbenefit, a consulting firm based in Chengdu. The yield premium on the June 2014 securities of China Shenhua Energy, the mainland's largest coal producer, over similar-maturity government notes surged to a record 231 basis points on February 8. That compares with 152 basis points for energy debt globally, Bank of America Merrill Lynch indices show.
Repayment difficulties among miners including Shanxi Liansheng Energy and the failed Shanxi Zhenfu Energy Group have already emerged this year, as slowing economic growth and anti-pollution policies drive coal prices to near a four-year low. Thirteen of the mainland's 50 publicly traded coal companies have a debt-equity ratio exceeding 100 per cent.
"Trust products have a very high probability of default this year," said Shi Lei, Beijing-based head of fixed-income research at Ping An Securities. "Coal mines' trust products are the weakest link."
China Credit Trust reached an agreement in January to repay investors in a three billion yuan (HK$3.8 billion) high-yield plan after Shanxi Zhenfu collapsed and was unable to meet liabilities. Holders of the Credit Equals Gold No1 product protested in Shanghai on Tuesday, seeking a better settlement.
Shanxi Liansheng has missed four payments on a 973 million yuan product issued by Jilin Province Trust and Haitong Securities said it could miss payment on a fifth tranche due yesterday.
"The fundamental reason for the decline in the coal industry is the slowing economy," said Li Qing, a bond analyst in Shanghai at Guotai Junan Securities.
That is adding to concerns as trusts face mounting redemptions. About 907 billion yuan of so-called collective trusts will come due this year, including 15 billion yuan tied to mines, Citic Securities estimated last month.
Investors in the high-yield product issued by China Credit Trust were bailed out days before it matured. China Development Bank, the biggest policy bank, lent two billion yuan to Shanxi Liansheng to help repay maturing trust products, the 21st Century Business Herald reported on February 14.
"There are different opinions on whether the government should allow defaults," said Li Ning, a bond analyst at Haitong Securities. "Regulators, such as the central bank, hope to build a sound system of sharing risks, while local governments and financial institutions still have low tolerance for defaults as they want to protect their own reputations."