next Chaori

An initial Chaori post-mortem

Investors are taking more care to assess the risks of each credit, wary of the potential for another default.

Now that China’s onshore bond market has seen its first default, what and who is next?

It's a question many onshore investors are asking, not least those holding some of the Rmb1 billion bonds issued by solar panel maker Shanghai Chaori Solar Energy Science and Technology, which last week made history by defaulting on an interest payment.

So far the rest of the onshore market has taken that news calmly. Weekly Chinese corporate bond issuance last week even hit a two-month high of Rmb10.8 billion ($1.7 billion), although a few lower-rated firms did delay their planned debt offerings in the immediate wake of the Chaori news.

But then the market appears to have some wriggle room and the Chaori story still has further to run. At least nine Chaori bond investors have since appealed to the government, Chinese market regulator and media for help, the official Xinhua News Agency has reported.  A bondholder meeting with the underwriter China Securities is also now due on March 26, to decide whether to pursue a civil lawsuit, restructure the company and/or sell some of the collateral backing the defaulted securities. 

From what can be gleaned, investors are still investing in Chinese corporate bonds but taking a bit more care to assess the risks of each credit, market participants said, while noting the possibility of further Chaori-type defaults.

"We are now filtering the bonds, especially those high-yield bonds we invested [in] and reviewing their risks,” said a Beijing-based credit analyst with a mid-sized commercial bank, which intends to dispose of the riskiest bonds after the review.

The bank, he said, has now effectively tightened its risk-management procedures by unofficially instructing investment managers to only buy notes from institutions rated higher than AA+, when previously the floor was set at AA-.

Where could the next Chaori emerge?

So where could further Chinese defaults take place?

For Chen Long, a financial market analyst with Dongguan Bank in Guangdong province, it is likely to depend on the sector.

“We believe that those overcapacity industries are most problematic,” said Chen, who is based in Dongguan. Among the sectors the government would like to streamline, aside from solar energy, are iron and steel, cement, coal, chemical, electrolytic aluminium and wind power equipment.

Also key is the relationship of the corporate bond issuer to government.

“The privately-owned companies who don’t have financial guarantees from the governments may have more risks than state-owned companies,” said Chen.

In the case of Chaori the Fengxian District Government in Shanghai — where Chaori is based —agreed to work with banks who had lent to the company to tackle its debt problems. However, the government shifted its attitude and didn't bail out at the last, according to two sources familiar with the situation.

Analysts suggest there is a bigger chance of default in those areas where local governments are most indebted, such as the southern areas of Jiangsu province as well as some districts of Beijing and Shanghai. 

Chinese companies that have posted significant and recurring losses are also vulnerable. At least 23 companies with bonds outstanding have recorded losses in the last two years and, as a result, may have higher default risks, according to a report by Haitong Securities.


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