Chemicals giant Shandong Yuhuang downgraded by S&P as it is ‘almost certain’ to default on two bonds, in latest sign of financial strain in China’s third-biggest province

Chinese petrochemical giant Shandong Yuhuang Chemical has been downgraded by rating agency S&P Global because it is “almost certain” to default on two domestic bonds in November and December, in the latest sign of the financial distress in China’s third-largest province.

Shandong Yuhuang’s long-term credit rating was lowered to CC from CCC+, and could plunge further to D if the company fails to repay principal and interest for an onshore bond that was due on Thursday within a grace period ending next week, S&P Global said in a report on Friday.

The firm suspended the trading of the onshore bond ,worth 500 million yuan (US$71 million), from Thursday, citing “a major event”.

It hit the price of the company’s international bonds hard. Its US$300 million dollar-denominated bond declined by 2.6 per cent to 62.38 cents in Hong Kong on Friday, after plunging by 13 per cent in its biggest one-day drop on Thursday.

A flagship among private firms located in Heze city in Shandong, China’s third-biggest province by gross domestic product, Shandong Yuhuang’s troubles are indicative of widespread liquidity stress faced by the local private economy. Over the years, companies in the region have formed a complex web of cross guarantees, exacerbating the problem as one company’s debt woes quickly spread to the rest in a chain of guarantee providers.

“We think it is highly unlikely that the company will receive timely support from the Heze city government or will be able to arrange refinancing for the two onshore bonds due in November and December 2019,” S&P analysts Crystal Wong and Danny Huang wrote in the report.

Shandong Yuhuang’s cash on hand is not sufficient to cover the two bonds, whose total value is 1 billion yuan, the analysts wrote.