Debt at China’s state-owned firms in question after BMW partner fails to repay billion-yuan bond

Brilliance Auto, owned by the Liaoning provincial government, says it is suffering from tight liquidity just four months after claiming it had US$7.65 billion worth of ‘cash and equivalents’

Company has failed to repay 1 billion yuan to its bondholders after the bond matured last week

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A car is assembled at a factory of Brilliance Auto in Shenyang, Liaoning province. The state-owned company has defaulted on a 1 billion yuan bond. Photo: Reuters

Published: 7:45pm, 29 Oct 2020Updated: 9:42am, 30 Oct 2020

A bond default by a big state-owned automaker, which is also the parent company of BMW’s joint venture partner in China, serves as a fresh warning about debt risks in the country despite strong headline economic growth numbers, according to analysts.

Brilliance Auto, also known as the Huachen Automotive Group, rattled China’s debt market last week by failing to repay 1 billion yuan (US$148.8 million) to its bondholders when the bond matured.

What made the news particularly shocking was the fact that the company is directly owned by the Liaoning provincial government, and that its own interim financial report claimed that it had 51.4 billion yuan (US$7.65 billion) worth of “cash and equivalents” as of the end of June.

The bond, which was issued in 2017 with a coupon rate of 5.3 per cent, matured on October 23. And its default appears to be just the tip of the iceberg. The company still has 13 batches of outstanding bonds totalling 16.2 billion yuan, and many of them will mature in 2021 and 2022.

Brilliance Auto, which has reported 190 billion yuan worth of total assets, said in a statement on Monday that it suffers from tight liquidity and difficult financing, but is still trying to repay bondholders.

But China’s credit rating agencies, which are usually generous in doling out good ratings, have rushed to cut the rating for Brilliance Auto in recent days.

The company’s default invokes memories of a slew of defaults on 7.1 billion yuan worth of bonds by Dongbei Special Steel in 2016 after its chairman committed suicide in his office. That marked the biggest bond-default case in China up to that point, and it came after China launched a deleveraging campaign in 2015 to curb excessive borrowing by local governments, financial institutions, businesses and individuals.