Top Securities Watchdog Launches Probe of Yongcheng Coal and Auditor

What’s new: China’s top securities watchdog started a probe of Yongcheng Coal and Electricity Holding Group Co. Ltd. and its auditor for possible violations related to a surprise default two weeks ago on 1 billion yuan ($153 million) of the state-owned coal mining company’s bonds.

The inquiry by the China Securities Regulatory Commission (CSRC) of Yongcheng Coal and its auditor Xi’an Xigema Limited Liability Accounting Firm followed the launch last week of investigations by the National Association of Financial Market Institutional Investors (NAFMII), China's interbank bond market regulator.

The market didn’t expect the default because Yongcheng Coal issued new bonds just 20 days before the Nov. 10 default, and the company’s financial statements showed it had enough cash to repay the bond.

The background: The default set off a chain reaction affecting other coal mining companies and local government financing vehicles in other provinces. Coal mining enterprises in Shanxi and Hebei provinces either canceled bond issuance plans or slashed fundraising targets. Traded coal bonds plunged across China.

The Henan province-owned company won the highest possible rating from a domestic credit rater just last month. It sold 1 billion yuan of mid-term notes last month and repaid another 1 billion yuan of notes 10 days earlier. The company’s financial statement showed it had more than 32.8 billion yuan of cash and cash equivalents as of the end of September. With rising coal prices in the second half of 2020, the company was expected to generate more than 1 billion yuan of net cash flow from operations in October, according to China Credit Rating Co. Ltd.

In a deal possibly brokered by the Henan government, Yongcheng Coal bondholders agreed to accept a 50% payment of principal and to extend the balance of principal and interest by 270 days, avoiding triggering defaults on billions of yuan more in debt.

Quick Takes are condensed versions of China-related stories for fast news you can use. To read the full story in Chinese, click here.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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