China's Bohai Steel Bonds off lows after Restructuring Report

24 March 2016

Bohai Steel Group's 2017 bonds held steady on Thursday, after bouncing from lows following reports the Chinese state-owned steelmaker was planning to restructure $29.61 billion in debt.

China's steelmakers are in the eye of a storm as Beijing moves to slim down bloated industries, including steel and coal, to make the economy more efficient and address a supply glut that has hammered coal and steel prices.

Online financial magazine Caixin reported earlier this week that the Tianjin city government, which fully owns the steelmaker, has set up a committee to try to resolve its debt problems as the company was unable to make certain repayments.

The restructuring would be the biggest since the global financial crisis, said Standard & Poor's analyst Christopher Lee said.

"Some sectors of state-owned enterprises face heightened financial risk because of the government's policy to close surplus capacity," he said.

Following the Caixin report, Bohai's offshore 1.5 billion-yuan 2017 bond dropped more than 25 points in two trading sessions to a low of 67 cents on the dollar. It marked the lowest price for the bond since it was issued in 2014.

The bond staged a recovery late on Wednesday and was quoted on Thursday in Asia unchanged at 75/80.

Bohai Steel Group, based in northeast China, declined to comment.


"In theory, if the company defaults, it is a big reputational risk for the Tianjin government," said a Hong Kong based trader. The price rebound reflected market expectations that the Tianjin government would want to avoid a widescale default.

Market expectations were further fuelled because, unusually for an offshore yuan issue, the Bohai Steel bond is fully guaranteed by the Bohai Steel Group, he said.

"So real money investors like this structure," the trader said.

Still, the Bohai Steel news highlights the risks present in the offshore yuan bond - or dim sum - market, which has generally attracted shorter-dated debt, said Owen Gallimore, an ANZ credit strategist.

"The dim sum market always had the riskier borrowers - the cream of the borrowers went to the dollar bond market. And this being a short-dated market, there is the constant refinance risk," he said.

Caixin said lenders owed money by the steelmaker include the Tianjin branch of the Bank of Beijing Co Ltd and 105 other financial institutions, including several trust companies such as Tianjin Trust, Beifang Trust and Guomin Trust.


Under the slogan of supply-side reform, Beijing has promised various measures to reduce the government's role in the economy, including restructuring state-owned industries.

But the heavy debt load of state-owned companies may make reform difficult. The steel, coal, cement and non-ferrous metals sectors carry debts of $1.5 trillion, which would have to be settled before companies can dip into government funds to handle layoffs.

Bond defaults and even bankruptcy are relatively rare in China, especially for state firms. But the government is trying to highlight the risks of rising debt and set up mechanisms to mitigate those risks.

The governor of China's central bank, Zhou Xiaochuan, warned last weekend about the sharp rise in corporate debt, which Standard & Poor's said had increased in 2014 to 160 percent of GDP, the highest in the world.

Beijing is studying plans to allow commercial lenders to swap non-performing loans of companies into equity stakes. It has also set up a pilot scheme to securitise bad debts and is opening the door to foreign investors of bad loans.

Guangxi Non-Ferrous Metals Group, a state-owned metal producer, filed for bankruptcy in December.

"The company has nearly stopped production and faced many lawsuits due to continuous losses and its main assets have been frozen," the Shanghai Clearing Exchange said in a statement on March 9.

China's first publicly announced default on domestic bonds was by solar equipment producer Chaori Solar in 2014.


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