Default looms for 300m yuan bond issued by Sichuan Shengda Group

Investors are due to be repaid this weekend on debt issued six years ago to fund a hydropower project in Sichuan

PUBLISHED : Friday, 04 December, 2015, 4:07pm
UPDATED : Friday, 04 December, 2015, 8:02pm

A corporate bond approved by the nation’s top economic planner is set to default, provoking ire among investors who might take legal actions against the issuer suspected of hiding key information in the prospectus.

Sichuan Shengda Group won’t be able to pay bondholders principals and interests amounting to more than 300 million yuan Saturday when the notes expire, according to its general manager Li Chuanrong.

He told the South China Morning Post in a telephone interview that a delay of the payment was certain while the company was trying to bring new investors including an A-share-listed firm to bail it out.

“A lot of details about the debt restructuring deal will be discussed, but the outlook is uncertain,” he said. “It will be some time before all the parties involved work out a solution.”

The default adds to evidence that the debt woes facing China’s slowing economy is exacerbating
Zhou Ling, a hedge fund manager at Shanghai Shiva Investment

Amid an economic slowdown, the failure by Sichuan Shengda to pay back investors could further expose low business morale and corruption scandals to the investment community.

Shengda issued the six-year bonds after receiving an approval from the National Development and Reform Commission (NDRC) three years ago to fund its hydropower project in Sichuan.

Bondholders have the right to sell back the six-year debts on December 5, 2015.

It will become the first bond default that was under the oversight of the NDRC.

A bondholder who spoke on condition of anonymity, said there were suspicions that the bond sale was conducted without providing investors truthful and complete information about the company’s operations.

“We found that Shengda hid some information about its business operations which were supposed to be published in its prospectus,” said a bondholder who declined to be identified. “Bond defaults in China seemed to not only arise from a slowing economy, but wrongdoings committed by some corporate officials.”

He added that Shengda, saddled with massive debts and technically insolvent, was suspected of misusing the proceeds to fund its brake hub manufacturing business.

The bondholders have hired a law firm to handle legal affairs related to the repayment while the source said they wouldn’t rule out possibility of suing Shengda.

Analysts said the default of a NDRC-approved bond reflected the severity of China’s debt woes, which provided a snapshot of the mainland’s lacklustre economic performance.

On the mainland, the bond market is fragmented with the NDRC, the central bank and the securities regulator having power to review and approve corporate bond sales on the interbank market and the stock exchanges.

The NDRC is responsible for the issuance and supervision of non-financial corporate bonds, which are issued by institutions affiliated to central government departments, local government-related institutions, state controlled enterprises, and other large-sized state-owned entities.

The planning agency won’t grant approvals unless the applicants have manufacturing projects that are in compliance with the country’s industrial development guidelines.

“The default adds to evidence that the debt woes facing China’s slowing economy is exacerbating,” said Zhou Ling, a hedge fund manager at Shanghai Shiva Investment. “It is likely to open a floodgate for a huge number of bond failures including those approved by the NDRC.”

Meanwhile, the NDRC ordered local economic planning agencies in March to deploy “steely defence” against any potential default this year as a way to maintain economic stability