Yongcheng Coal Default Leaves Ratings Agency Banned From Ratings for Three Months

China’s bond market regulator slapped a three-month business ban on one of the country’s top credit rating companies, citing its role in the surprise Yongcheng Coal default that rattled China's bond market last month.

China Chengxin International Credit Rating Co. Ltd. was banned from rating new interbank bonds for three months over misconduct in rating services for state-owned Yongcheng Coal and Electricity Holding Group Co. Ltd. and its parent Henan Energy and Chemical Industry Group Co. Ltd. The National Association of Financial Market Institutional Investors (NAFMII), the interbank bond market’s self-regulatory body, disclosed the penalties Tuesday in a statement (link in Chinese).

Yongcheng Coal, to which China Chengxin gave its highest AAA rating, abruptly defaulted on a 1 billion yuan ($153 million) ultra-short-term bond, setting off a chain reaction that spread to other coal mining companies and local government financing vehicles in other provinces. Following the default, several mining companies either canceled bond issuance plans or slashed fundraising targets, while traded coal bonds plunged across China.

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NAFMII said China Chengxin failed to conduct on-site due diligence on Yongcheng Coal or talk in person with company executives to fully understand the business situation. China Chengxin was aware of Yongcheng Coal and Henan Energy’s delayed salary payments and abnormal debt overhang but didn’t take adequate measures to assess and disclose the risks, the regulator said.

NAFMII urged the rating company to take corrective measures during the business suspension.

China Chengxin said in a statement that it accepts the penalties and has launched an internal investigation. The company promised to punish people who are found accountable.

China Chengxin earlier said the absence of on-site due diligence was partly due to business interruptions during the pandemic lockdowns and blamed Yongcheng Coal for blocking in-person interviews with employees, Caixin learned.

The punishment came one month after NAFMII launched investigations of several financial intermediaries linked to Yongcheng Coal’s default. The investigations covered major underwriters of Yongcheng Coal’s bond issuance — Industrial Bank, China Everbright Bank and Zhongyuan Bank — as well as Xi'an Xigema Certified Public Accountants Firm Ltd. and China Chengxin.

The regulator also placed Haitong Securities Co. Ltd. and subsidiaries under probe for suspected violations related to Yongcheng Coal’s bond sales.

Haitong, China’s sixth-largest bond underwriter by value, said last week that three company executives were punished in the matter.

The Yongcheng Coal default sent a fresh alert to the market about the real creditworthiness of China’s highly rated state-owned enterprises (SOEs). China’s credit rating industry has long been plagued by concerns about inflated ratings that failed to reflect risks. According to Huachuang Securities, bond issuers with ratings in the top range account for more than 96% of China’s outstanding corporate bonds.

Chinese regulators have vowed to tighten scrutiny of market abuse amid the rising wave of corporate bond defaults. Top bond regulators Tuesday released new rules unifying information disclosure requirements for bonds issued by nonfinancial businesses in the latest effort to toughen market regulation.

The central bank last week pledged to deepen reforms in the bond market and boost law enforcement, echoing top policymakers’ call at China’s annual Central Economic Work Conference this year to improve the legal framework of the bond market.

China Chengxin was ranked at the top of the country’s credit rating companies by the National Development and Reform Commission. The company rated 1,381 bonds on the interbank market in the third quarter, the most among all rating providers, according to NAMFII.

Luo Meihan contributed to this story.

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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