Chaori bondholders have slim chance of getting money back

Mainland investors caught out by the country's first default of a domestic bond face obstacles to ever recovering any funds from the solar equipment maker.

Shanghai Chaori Solar Energy Science & Technology failed on Friday last week to make an 89 million yuan (HK$112.5 million) interest payment on a one billion yuan five-year bond it issued in 2012. The bond was issued with a fixed coupon of 8.98 per cent.

Market participants hailed the default as a landmark for the mainland's financial markets, turning on its head the assumption that bonds enjoy an implicit government guarantee, which for years had left investors oblivious to the notion of risk.

Investors are also looking at how Chaori's bondholders will be treated since a massive buildup in corporate debt on the mainland has raised the prospects of more defaults to come.

The underwriter and the trustee of the bond, China Securities, is convening a bondholders' meeting on March 26 and has promised to support legal action against Chaori.

But mainland courts are unpredictable and lack legal precedents for handling the case. Importantly, the bonds were not guaranteed, leaving the bondholders low in seniority among Chaori's creditors, who have already filed lawsuits demanding payment of other debts.