HITIC default may signal a restructuring, say optimists

HITIC''s failure to make a $6.9 million bond interest payment puts the bondholders in bed with the creditor banks, suggesting a restructuring plan may be in the offing.

Hainan International Trust & Investment Corp (HITIC) raised few eyebrows when it failed to pay the $6.9 million interest due on its Y14.5 billion ($135 million) 2001 Samurai bonds within a 14-day grace period. That was extended after it missed an original payment date of 26 June. This was despite assurances from Jin Liqun, vice-minister at the Chinese Ministry of Finance, that HITIC - the investment arm of the Hainan provincial government - would come up with the money. Liqun said the default resulted from a technical problem.

The only real surprise for holders of HITIC's 2001 and Y14 billion 2004 Samurai bonds is that they have been receiving interest at all in the last two years. "This company stopped paying its foreign creditor banks back in 1998," says one credit research head. One unique feature of HITIC's financial woes has been the banks' support of bondholders' receiving interest payments; something which quite clearly relegated them to the second division of HITIC's unsecured creditors. The bond interest payments, says the research head, showed the Chinese government placed some value on overseas creditor groups and hence gave the banks cause for hope.

The more optimistic among HITIC's creditors hope the cessation of bond interest payments is designed to put the bondholders and banks on an even footing ahead of a possible restructuring - the Chinese government has made it clear it does not want any more major ITICs, of which HITIC is one, following Guangdong International Trust & Investment Corp (GITIC) into liquidation.

Whether HITIC deserves to be saved is another question. The banks were steering clear of it as early as 1995/96 - well before the Asian financial crisis broke. At end-1998, the company had debts totalling Rmb4.56 billion ($551 million) and it announced a Rmb6.73 million yuan loss for the year.

The ability of other Chinese entities' ability to tap capital markets for funds remains unaffected following the HITIC default as evidenced by the Chinese government's Y30 billion 2005 Samurai bond, which was priced at end-June just after HITIC missed its 26 June interest payment. The issue was priced to yield 40 basis points over yen-LIibor - the tight end of the issue's pre-marketed range.