China State Steel Firm to Default After Government Said to Help

20 October 2015

A Chinese state-owned steel trader is set to default on a bond payment even after the government was said to have stepped in to help, highlighting worsening corporate finances as an economic slowdown deepens.

Sinosteel Co. will delay an interest payment due Tuesday on 2 billion yuan ($314.5 million) of 5.3 percent notes that mature in 2017, according to a statement on Chinabond’s website Monday. The firm delayed payment as it plans to back the securities with stock of its unit Sinosteel Engineering & Technology Co., and that may affect issues related to interest payment, it said without elaborating. The failure to pay interest on time constitutes a default, according to Industrial Securities Co., Haitong Securities Co. and China Merchants Securities Co.

“Investors have fully expected Sinosteel’s default,” said Sun Binbin, a bond analyst at China Merchants Securities. “It’s possible it will pay the interest later, which would be better than the market expectation.”

More Chinese firms are struggling to repay obligations, and government-backed companies aren’t immune, as defaults this year had already included two state-owned enterprises, according to China International Capital Corp. The National Development and Reform Commission planned to meet Sinosteel investors, people familiar with the matter said last week. The yuan’s fall, a stock rout and speculation that bubbles are forming in the debt market have fanned concern.

Two calls Tuesday to Beijing-based Sinosteel went unanswered.

Risks Revealed

Credit risks in China’s bond market are gradually being exposed to investors, said analysts led by Tang Yue at Industrial Securities in a report Tuesday.

Investors can’t sell back Sinosteel Co.’s 2017 notes until Nov. 20, after an original option date of Oct. 20, according to a company statement posted on Chinabond’s website Friday that didn’t say if investors agreed on the changes.

Parent Sinosteel Corp. had sent a letter to noteholders pleading with them to not sell the bonds back as Sinosteel would be unable to repay if investors exercise the option, people familiar with the matter said last week.

The parent company had told bondholders the NDRC and the State-owned Assets Supervision and Administration Commission of the State Council are coordinating with related parties to prevent a default.

Sinosteel Corp. and its units had more than 100 billion yuan of debt as of December last year, media company Caixin reported in May, citing data collected by a debt commission led by Bank of China. Sinosteel Co. is yet to release its 2014 financial report.