2014-08-06

Private Bond Market Goes Bust

I have been covering the ongoing defaults in the private bond market, most recently here: Who Broke China Bond Market's No Default Streak? Mutual Credit Guarantees

Bloomberg has picked up the story.

China Default Storm Seen as Record Private Bonds Mature
Tianjin Tianlian Binhai Composite Materials Co., which makes polymeric composite materials, couldn’t pay back principal and interest on its notes when investors exercised their option to sell back the securities July 28, Caixin Online reported July 31, without saying where it got the information. Tianjin Tianlian’s 50 million yuan of bonds are due on Jan. 29, 2015, according to China International Capital Corp. Three calls to the manufacturer went unanswered.

Huzhou Jintai Science and Technology Co. failed to repay the principal and interest on 30 million yuan of its debentures when investors tried to sell them back on July 10, according to a CICC report released on July 25. The report said Zheshang Securities Co., the notes’ lead underwriter, informed the Shanghai Stock Exchange on July 18. Two calls to Huzhou Jintai went unanswered.

A local court accepted an application for bankruptcy by Zhejiang Walters Polymer Technology Co. on March 12, according to a statement on Anji County People’s Court’s website. Investors could sell back 60 million yuan of the company’s bonds on July 23, according to CICC. An official who wouldn’t disclose her name declined to comment on the repayment status yesterday.

......“The government has a high tolerance for defaults in the private bond market because the investors are institutional investors who can tolerate higher risks than individuals,” Shanghai-based Li said. “The government can’t save every single company.”

Two points not covered in the Bloomberg article. Huzhou Jintai, as mentioned in the blog post linked above, isn't having operational difficulties. They have gone bust due to making credit guarantees for other companies that went bankrupt. For each of these bankruptcy cases, there could be several, a dozen, or dozens of firms involved.

In Credit Guarantee Firms Continue to Implode, Private Bonds Default, an analysts in one article was quoted saying he expected the default in Tianjin to raise regional borrowing costs by 50 basis points. That's a ballpark figure, but the key point is that these credit markets are local. What looks like a small credit event is much larger than it appears.

China's credit risk is systematic, it spreads via mutual guarantees between companies, and risk is localized. That puts great pressure on local governments that may be having their own financial problems due to the slowdown in land sales, so bailouts are unlikely. It also means risk is hidden——companies with seemingly no risk may in fact be at great risk due to mutual guarantees.

No comments:

Post a Comment