Japanese creditors have declared the Samurai bonds issued by Hainan International Trust & Investment Corp (Hitic), in default of 28.5 billion yen (about HK$2.05 billion). The declaration by Sumitomo Bank and other Japanese creditor banks, effectively a demand for immediate payment, is the first default of a mainland company on the Samurai market. It heightens uncertainties about how the beleaguered Hainan provincial government's fund-raising and investment arm plans to structure a scheme to repay creditors. The default followed Hitic's failure to make good on a 238-million yen coupon payment to holders of a 14-billion yen seven-year Samurai Bond issued in 1997. The coupon originally was to be paid on September 25, however, bondholders extended a 14-day grace period which expired on Monday. Japanese banks also called a default against a 14.5 billion yen seven-year Samurai note issued in 1994. Hitic had trouble making an interest payment on that bond in June, but the underwriters decided against declaring an official default. The company made a payment on July 27. The Japan Credit Rating Agency yesterday downgraded the two bond series to D, effectively default status. Japanese bankers declined to discuss the matter, however it is expected the Hainan company's problems will figure prominently in discussions when Premier Zhu Rongji arrives in Tokyo today. Analysts said Hitic's bond default certainly would sour overseas investors to non-sovereign mainland offerings and make it more difficult for China's non-investment grade companies to raise money offshore. However, the company's problems are not likely to have an impact on Beijing's planned US$1 billion, 10-year international sovereign issue expected in the middle of next month. Hitic is not the first mainland window company to default on an international bond issue. In 1998, Guangdong International Trust & Investment Corp defaulted on two series of Yankee bonds worth US$350 million after the company was declared bankrupt. Provincial investment company Guangdong Enterprises (Holdings) also has defaulted on a 10-year US$500 million bond issued in 1997. 'The bond market will make a clear distinction between sovereign and non-sovereign credit,' said Andy Xie Guozhong, senior regional economist with Morgan Stanley Dean Witter in Hong Kong. Still, the default casts greater uncertainty over how Hitic's long-awaited restructuring is likely to proceed. Hainan sources said the company had been placed under the supervision of a provincial government restructuring office and ordered to halt all business activity. Company and government officials in the island province yesterday refused to speculate on a timetable for the plan. However, creditors to Hitic and other debt-plagued Hainan-based trust companies believed the default represented the first move by the government to structure a proposal which would offer substantially less than the face value of the company's debts. Foreign creditors to other indebted mainland trust companies have accepted settlements that saw them forfeit substantial claims in return for immediate payments. Foreign creditors to Dalian International Trust and Investment Corp earlier this year accepted a deal which saw repayment of only 60 per cent of the company's US$150 million debts. An official with the non-bank financial institutions department of the People's Bank of China said it had not determined how to proceed. 'It will be decided by the governor,' the official said, referring to central bank governor Dai Xianglong.