Caixin
Nov 25, 2020 07:32 PM
FINANCE

Interbank Regulator Finds Signs of Illegal Behavior at SOE That Roiled Bond Market

NAFMII said that it would punish Yongcheng Coal, without giving details of the company’s wrongdoings.
NAFMII said that it would punish Yongcheng Coal, without giving details of the company’s wrongdoings.

China’s interbank market regulator has found signs of possible illegal behavior at state-owned Yongcheng Coal and Electricity Holding Group Co. Ltd., which roiled the bond market by defaulting on a 1 billion yuan ($151.9 million) bond earlier this month.

Evidence potentially showing illicit activity at the coal miner has been passed to the securities regulator, said a statement (link in Chinese) published Tuesday by the National Association of Financial Market Institutional Investors (NAFMII), a self-regulatory organization for the interbank market backed by the central bank.

Financial regulators are looking to ease investor concerns about the corporate bond market. Yongcheng Coal’s surprising default has sent a shockwave through the market, triggering selloffs of debt issued by some of its fellow miners and state-owned enterprises (SOEs) and leading to some companies cancelling their plans to sell bonds.

Yongcheng Coal’s default on its ultra-short-term bond came as a surprise as the SOE received the highest possible rating from China Chengxin International Credit Rating Co. Ltd. last month.

Since the default on Nov. 10, the NAFMII has launched investigations not only into the Henan province-based SOE, but also into intermediaries that facilitated the issuance of its bonds, including several lead underwriters, the ratings agency and an accounting firm, to find out whether they committed wrongdoings. Knowledgeable sources told Caixin that possible wrongdoings include debt evasion, financial fraud, false ratings and false information disclosure.

 Read more 
Cover Story: How SOE Default Wave Shows State Bailouts Are Over

The country’s top financial regulator, the Financial Stability and Development Committee (FSDC), on Saturday vowed to strictly investigate any bond issuer suspected of rule violations including fraudulent issuances, disclosure of false information, malicious transfer of assets, and embezzlement of bond issuance funds. The FSDC is a cabinet-level body under the State Council that oversees various agencies supervising China’s financial sector.

NAFMII said that it would punish Yongcheng Coal, without giving details of the company’s wrongdoings. The regulator also said that it has launched an investigation into the coal miner’s parent, Henan Energy and Chemical Industry Group Co. Ltd., after finding its potential violations.

Yongcheng Coal was able to win itself more time to repay its debt when it persuaded bondholders earlier this week to accept a 50% repayment of the 1 billion yuan principal first and nine-month extension on repayment of the rest.

The extension enables the company to avoid triggering cross defaults on 15 billion yuan of its own bonds and 11.5 billion yuan of debt issued by its parent.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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