Caixin
May 08, 2019 05:45 AM
FINANCE

China Starts Trading of Defaulted Corporate Bonds

Chinese issuers defaulted on bonds with a total face value of 23.3 billion yuan during the first four months of 2019. Photo: IC Photo
Chinese issuers defaulted on bonds with a total face value of 23.3 billion yuan during the first four months of 2019. Photo: IC Photo

After record defaults on corporate bonds, China is allowing the trading of matured defaulted bonds for the first time on two state-owned financial-asset transaction platforms.

The first completed transactions were in matured bonds of China’s second-largest defaulter of last year, Wintime Energy Co. Three transactions with a total face value of 282 million yuan ($41.6 million) of Wintime’s defaulted bonds were conducted in February and March at Beijing Financial Assets Exchange.

This is an important innovation to proactively dispose of defaulted bonds, stabilize the market and prevent malicious escape from debts, a person close to the central bank told Caixin. Trading in defaulted bonds at steep discounts from face value will become a normal operation at the Beijing Financial Assets Exchange and the central bank’s China Foreign Exchange Trade Center as part of an effort by the central bank to establish a defaulted-bond trading system, sources said.

“Since the transfer prices at the Beijing Financial Assets Exchange are transparent, the valuation on some defaulted bonds could become the reference for a future junk bond market,” one market participant told Caixin. Buyers of such bonds bet that defaulters may eventually pay up, while sellers benefit by recovering some portion of the unpaid debts.

Defaults on Chinese corporate bonds reached a record last year and continued to take place this year, reflecting business struggles amid cooling economic growth. Last year, defaults on corporate bonds soared nearly fourfold from 2017 to a record 120 billion yuan. The value also exceeded the combined amount for the previous four years, when defaulted corporate bonds totaled 110.5 billion yuan.

Chinese issuers defaulted on bonds with a total face value of 23.3 billion yuan during the first four months of 2019, a 70% increase from the same period in 2018, according to Reuters.

The Financial Market Department of the People’s Bank of China is working on specific rules and regulations on the trading of defaulted bonds, Caixin learned from several sources.

Wintime and Jiangsu Hongtu High Technology Co. Ltd. are the only two companies whose defaulted bonds have been traded so far.

Wintime, a coal producer in the northwest province of Shanxi, was China’s second-largest defaulter in 2018 with outstanding debts totaling 63.2 billion yuan. It defaulted on bond repayments of 18.8 billion yuan as of February.

Shanghai-listed electronics manufacturer Jiangsu Hongtu High Technology has been punished for falsely claiming that investors agreed to extend the repayment period for a bond on which it subsequently defaulted.

In the latest auctions at the China Foreign Exchange Trade Center last month, five institutions participated in bidding on two Wintime bonds and one Jiangsu Hongtu bond. Only Jiangsu Hongtu’s bonds were successfully sold. However, market participants see significance in this move even if no deals are reached.

One of Wintime’s defaulted bonds listed on the Beijing Financial Assets Exchange has a face value of 200 million yuan and a listing price of 110 million yuan. Even though the exchange hasn’t disclosed a final transfer price on the bond, one bond investor said such a price would represent a high recovery rate.

Many investors still believe Wintime eventually might be able to repay the bond, the investor said.

Contact editor Han Wei (weihan@caixin.com)


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