China's watchdogs step in to avert Sinosteel bond default

Mainland regulators make rare intervention in bond market, with the company's debt holders told to redeem their notes a month later

PUBLISHED : Tuesday, 20 October, 2015, 12:42am
UPDATED : Tuesday, 20 October, 2015, 12:42am

The National Development and Reform Commission and the State-owned Assets Supervision and Administration Commission have, in a rare intervention in the bond market, pre-empted a potential default by Sinosteel.

This is the first time state regulators have intervened in a corporate credit case. In the five previous cases in the country this year, the companies were bailed out by shareholders.

"You can't get to a liberal and open market where nobody fails," said Jini Lee, a partner at law firm Ashurst. "There has got to be some controlled defaults along the way if it is to transform into a market-driven economy.

"It's a question of how that is managed - and how that doesn't trip up the whole system."

Lee previously advised the Ministry of Finance on its first offshore listed bond issue.

After a meeting with NDRC representatives on Friday, Sinosteel debt holders were first asked not to redeem the bonds and then told the redemption date would be delayed by a month to November 16.

The emergency meeting came as investors could from today redeem up to two billion yuan of the principal on the bond that matures in 2017.

Sinosteel has been grappling with its finances amid the economic slowdown, with its debt-equity ratio hovering above 90 per cent in recent years. It has earlier brushed off rumours of it defaulting on its bank loans.

More corporate bond defaults might become the norm as the slowdown deepened, Nomura China chief economist Yang Zhao warned.

Company issues make up only 4.3 per cent of the country's 35 trillion yuan bond market. Most of the bonds in the country - 70 per cent issued by the government and policy banks - are still held to maturity.

Cases like Sinosteel's will start to test the robustness of the nation's bankruptcy laws, information disclosures and the soundness of its credit rating system.

Meng Xiaoning, the chief executive of TF Securities, said he was cautiously optimistic on the drive to internationalise the country's bond market.

He said he believed the level of foreign holdings could increase from the current 2.5 per cent level to 10 to 20 per cent in the medium term.

But the fragmented market and inconsistent issuance standards would make it difficult to progress on further market links.

"Investors wouldn't know how to differentiate or choose," Meng said. "The credit rating mechanism is not yet sufficient. The overall market transparency is not yet there.

"There is not yet enough distinction in the guarantees provided by government-background or government-guaranteed credits."

Meng noted that 55 per cent of all debt instruments are rated triple-A and 29 per cent AA-minus or above. Only 9 per cent are ever given ratings other than A.

Policymakers are reviewing plans to increase the internationalisation of China's bonds, planning a bond connect on the lines of the Shanghai-Hong Kong Stock Connect scheme.