Qinghai Provincial Yuan Bonds Steady on Coupon Payment Hopes

​(Bloomberg) -- Qinghai Provincial Investment’s onshore bonds barely moved on Monday after the company missed coupon payment on a dollar bond on Friday, according to credit traders. 

"Investors haven’t given up on hopes that the overdue coupon could be repaid somehow," says Wu Qiong, executive director at BOC International in Hong Kong 

The state-backed aluminum producer doesn’t have enough cash offshore to make a $10.9m interest payment on its $300m 2020 bond, a company official who asked not to be named said on Friday.

While Qinghai Provincial’s dollar bonds posted sharp losses, the negative sentiment didn’t spill over to other credits, according to traders.

Qinghai Provincial narrowly missed a default of its dollar bonds in September last year following months of uncertainty. It also repaid another dollar note in December 

Here are other analyst comments on the default: 

CreditSights research analyst Claire Long: “This event is not good for sentiment toward LGFVs - investors, especially non-Chinese ones, will be cautious on new issues at least in the near term.”

Great Wall Pan Asia Asset Management’s director of fixed income Vivien Gui: “It changes the assumption that any Chinese SOE issuer will try to keep a clean image offshore. Back during the 1997 Asian financial crisis, investors debated which bond the issuer would
choose to default, onshore or offshore. Maybe we need to debate the same again. It in fact will impact the way we look at the whole Chinese SOE sector going forward. After all, 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.”

Lucror Analytics credit analyst Chuanyi Zhou: “The sentiment for offshore LGFVs will be affected by the default, be it a real default or a technical one. However, the profiles, both in terms of standalone fundamentals or government support, of LGFVs differ significantly. The primary market will likely still welcome LGFVs that are capable of repaying their debt on their own or the ones with strong government backing.”

Schroder Investment Management head of credit research for Asia-ex Japan Raymond Chia: “When it comes to buying LGFV bonds, investors always take government support as a given. The Qinghai case is an awakening. Sentiment will be affected and investors will have to rethink about taking implicit government support for granted when buying these bonds. Until we see how this Qinghai default pans out, I think investor sentiment around these names will muted in the near term.”

By Ina Zhou, Annie Lee, Narae Kim and Carrie Hong
--With assistance from Tongjian Dong.

2019-02-25 04:59:33.191 GMT