Jul 19, 2016 07:19 PM

Investors Seek Liaoning Debt Boycott As Bond Default Battle Heats Up

(Beijing) – Bond holders burned by the defaults of a state-owned steel maker in Liaoning province are calling for a boycott of all new bond issuances by the local government and provincial enterprises amid increasing frustration at local officials’ efforts to resolve the company’s debt problem.

They will also ask regulators to suspend the issuance of all debt financing instruments by enterprises in the northeastern province, according to a proposal put together for discussion at an upcoming meeting of investors who hold bonds issued by Dongbei Special Steel Group Co.

Sources with knowledge of the matter told Caixin that all bond investors who plan to attend the meeting have agreed on the proposal.

Dongbei Special Steel, a leading producer of special alloys such as those used in making automobiles, has defaulted on the repayment of seven bonds with a combined value of 3.1 billion yuan since March 28. The State-owned Assets Supervision and Administration Commission (SASAC) of the Liaoning Provincial Government, which holds 46 percent of the company’s shares and is the largest shareholder, has drafted a plan to resolve the company’s debt problems.

The plan calls for banks to swap 70 percent of their loans to the steel company into equity, and for the lead underwriters of the bonds to lend the firm money to allow it to repay the remainder of the outstanding bonds, a person close to China Development Bank (CDB) told Caixin.

CDB is one of the country’s three policy lenders and the lead underwriter for three of the bonds Dongbei Special Steel defaulted on.

But investors say the plan, which was issued last week without consultation with investors or the bond underwriters, is unfair and unfeasible, sources close to the situation told Caixin. Bond holders have accused the provincial government of "failing to do its job."

Calls to officials at the Liaoning SASAC and Dongbei Special Steel Group were not answered.

The proposal calls on the National Association of Financial Market Institutional Investors (NAFMII), which helps the central bank regulate the interbank bond market, to "suspend the issuance of all debt financing instruments Liaoning enterprises" in the interbank market.

It also urges that requests be made to the China Securities Regulatory Commission, the China Banking Regulatory Commission and the National Development and Reform Commission to bar the Liaoning government and all enterprises in the province from using the borrowing channels under their supervision. That would include bank loans and bonds issued not only on the interbank market but also the country’s stock exchanges.

The proposal also calls on "all financial institutions to stop purchasing bonds issued by the provincial government and enterprises."

The unusually harsh demands reflect the growing frustration of banks, underwriters and investors at the way the Liaoning provincial government has handled the Dongbei Special Steel situation, the sources said.

"Banks were shut out of all meetings the government held to discuss how to resolve the problem, even though they are the largest creditors," an executive with one of the company’s creditor banks, said.

A source close to CDB said that banks "will not implement the plan, because there is no arrangement at all to improve the company’s creditworthiness."

"The plan is all about protecting the government’s own interest as much as possible, with no consideration at all given to the lawful interests of other bond holders," a bond investor said. "It is not feasible at all."

The dispute has further weakened investor confidence in debt securities issued by the Liaoning government and local enterprises, which are already under severe pressure as the mining and heavy manufacturing industries which support the province’s economy struggle amid weak demand.

The coupons of two bonds issued by the provincial government in May and July were higher than the yield on the debt of many other local governments, indicating that investors see a greater risk to the Liaoning government’s ability to repay its debts.

The bond issues succeeded only because the provincial government "forced local banks to buy them," one investor said.

The provincial government has demonstrated neither the intention nor the ability to maintain effective communication with investors to deal with Dongbei Special Steel Group’s problems, the investor said. This has made "everyone shy away from the bonds of Liaoning enterprises," he said.

(Rewritten by Wang Yuqian)

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