Slashed Credit Rating Raises Specter of Further Defaults From State Energy Firm
Concerns are rising over the prospect of further defaults from a state-owned energy firm whose credit rating has been slashed after failing to repay hundreds of millions of yuan earlier this month.
Fitch Ratings Inc. downgraded Chongqing Energy Investment Group Co. Ltd.’s long-term foreign-currency issuer default rating to “Restricted Default” (RD) from “BBB,” the ratings agency said in a Wednesday statement.
Fitch also lowered its standalone credit profile to “RD” from “B-” as its repayment obligations under an onshore letter of credit and a bank draft had become overdue.
An “RD” rating indicates an issuer has experienced an uncured default or distressed debt exchange on a bond, loan or other material financial obligation, but has not entered into insolvency.
The negative outlook added to investor concerns about hidden risks in China’s bond market, and exemplified debt-ridden SOEs’ struggles to avoid defaults amid a regulatory crackdown on misconduct in the bond market.
On March 1, Chongqing Energy failed to repay a combined 915 million yuan ($141 million) on debts, including a bank acceptance note from Ping An Bank Co. Ltd. (000001.SZ) and a letter of credit from China Zheshang Bank Co. Ltd. (601916.SH).
Chongqing Energy on Tuesday suspended trading of its $500 million 5.625% bond due in 2022 on the Hong Kong Stock Exchange. On the same day it said in a filing that it’s experiencing a short-term liquidity issue and is proactively exploring debt resolution options.
Fitch said Wednesday that Chongqing Energy has stopped participating in the rating process and thus it had withdrawn its ratings, adding that the company had not provided consistent and sufficient information on key factual issues nor has it made any public disclosure on its latest operating and financial position.
Chongqing Energy’s owner, the Chongqing State-owned Assets Supervision and Administration Commission, on Wednesday told Caixin in a telephone call that “the city will make further arrangements” to deal with the company’s debts.
Founded in 1989, Chongqing Energy mainly produces coal, electricity, aluminum, gas, and clean-energy products. At the end of September, it had 101.9 billion yuan of assets and 73.9 billion yuan of liabilities, according to its third-quarter report (link in Chinese).
The company’s coal business is a major source of debt. At the end of last year, most of its 47 billion yuan of interest-bearing debt was in the form of bank debt and finance leases related to its coal-mining operations, Fitch said in a February statement. However, Chongqing Energy has decided to close all 14 of its Chongqing-based coal mines by July under the country’s supply-side reforms, according to Fitch.
Chongqing Energy’s default is not the only state-owned enterprise (SOE) to default recently. Another state-backed coal miner, the Henan province-based Yongcheng Coal and Electricity Holding Group Co. Ltd., defaulted on a 1 billion yuan bond on Nov. 10, sending shockwaves through the market, triggering selloffs of some SOE bonds and driving some companies to cancel planned issuances. It also drew the ire of China’s top financial regulator, which in November pledged “zero tolerance” for misconduct after revelations that Yongcheng may have defaulted intentionally in an effort to dodge its debt.
Contact reporter Timmy Shen (email@example.com) and editor Joshua Dummer (firstname.lastname@example.org)
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