Some Bondholders Shrug as a Local China Borrower Skips Payment

(Bloomberg) -- An unexpected bond payment failure by a Chinese state-backed borrower that rattled offshore bondholders isn’t appearing to unnerve its onshore creditors who are betting it will still be able to scramble funds to repay the debt.Qinghai Provincial Investment Group Co., an aluminum producer which is also considered by some as a local government financing vehicle, didn’t wire funds to pay a coupon due Feb. 22 as of late afternoon China time thanks to insufficient cash. That was according to an official at QPIG, who asked not to be named citing company policy. There is no grace period for missed interest on this dollar note, according to the bond document, suggesting it’s now in default. 

"Investors haven’t given up on hopes that the overdue coupon could be repaid somehow," says Wu Qiong, executive director at BOC International Holdings Ltd. in Hong Kong. This optimism is reflected in its yuan-denominated notes which barely reacted to the news. In contrast, its dollar bonds posted a record plunge on Monday. The diverging market reaction shows investors at odds on whether continued state support will be forthcoming in this case. After all, QPIG narrowly missed a default of its dollar bonds in September following months of uncertainty, and also repaid a dollar note in December. It’s in discussions with two
large state-owned companies to shore up support, people familiar with the matter said last month. Calls to QPIG’s financing manager went unanswered.

“The sentiment for offshore LGFVs will be affected by the default, be it a real default or a technical one," said Chuanyi Zhou, a credit analyst at Lucror Analytics. "Despite that we expect the government to still somehow support Qinghai’s bonds," she said.

Investor Caution

Offshore investors have turned more sceptical on state-support assumptions. QPIG’s case is an awakening for Schroder Investment Management Ltd. "Investors will have to rethink about taking implicit government support for granted," said Raymond Chia, its head of credit research for Asia excluding Japan. Great Wall Pan Asia Asset Management said this has changed the way it looks at Chinese state-owned companies going forward. "Many Chinese SOEs are weak on standalone basis but get a final rating with rating uplift from government support assumption.

Now the assumption is gone. We really have to re-examine the sector, especially for LGFVs,” Vivien Gui, its director of fixed income said.


2019-02-25 07:51:25.894 GMT

By Bloomberg News

--With assistance from Tongjian Dong.