Chinese bondholders face heavy losses as metal producer folds

HONG KONG (REUTERS) - State-owned Guangxi Non-Ferrous Metals Group has been forced into liquidation after restructuring attempts failed, in an unprecedented move that underlines the risks facing domestic Chinese bondholders, IFR said.

The metal producer was declared bankrupt by an intermediate court in Nanning, the capital of the south-western province of Guangxi, on Sept 12, leaving in the lurch holders of two private placement notes of 1 billion yuan (S$204.29 million).

While several state-owned issuers have defaulted on their obligations, investors have yet to suffer heavy principal losses on a public bond. Some borrowers have managed to repay bondholders in full after securing funding elsewhere, while others have extended their maturities. In some cases, negotiations remain ongoing.

Analysts have warned that more investors will have to accept losses as issuers from industries in overcapacity head into similar winding-up situations.

Guangxi Non-Ferrous, a frequent issuer, failed to repay bonds that matured in February and April. Those obligations remained outstanding at the time of the court ruling.

The metals group filed for restructuring at the end of last year, but failed to come up with a court-ordered reorganisation plan within a six-month window.

That brought an end to the restructuring period and, thus, the company was declared bankrupt, said the intermediate court.

According to a report in financial magazine Caixin, Guangxi Non-Ferrous had a debt-to-assets ratio of 216.77 per cent at the time it filed for restructuring.

The company had total debt of 14.5 billion yuan at the end of March after posting losses for three consecutive years from 2012 to 2014.

"Bondholders of Guangxi Non-Ferrous Metals are likely to take a haircut," said Ying Wang, senior director of corporate ratings at Fitch. "It is unlikely this time that Guangxi Non-Ferrous Metals will follow the precedent of Chaori in which bondholders were given priority and paid out in full."

Shanghai Chaori Solar Energy Science and Technology remains the first and only Chinese bond issuer to settle a default through the courts.

Chaori, which failed to pay interest on 1 billion yuan bonds listed on the Shanghai Stock Exchange in early 2014, repaid the notes in full at the end of the year after introducing strategic investors, even though that left other creditors with losses.

Chaori's case underscored the priority given to bondholders, particularly to retail bondholders on the stock exchange market.

Concerns over individual investors did not come into play with Guangxi Non-Ferrous Metals as its notes were privately placed to institutional investors, mainly securities firms and banks, in the interbank bond market, analysts said.

"Once a debtor company arrives at liquidation, all common creditors will be treated equally," said a Beijing-based credit analyst with a major Chinese securities firm.

According to the country's enterprise bankruptcy law, common claims come after administrative expenses, employee claims and tax claims.

Although the amount bondholders could recover was uncertain at the moment, the rate was likely to be less than 20 per cent, based on historical data of SOE liquidations, the analyst said.

As the central government withdraws support for some of the non-viable companies in struggling industries, bond investors will see more issuers going down a similar path.

Dongbei Special Steel, which missed payments on bonds of about 4 billion yuan, is likely to be the next issuer heading to the courts.

The Liaoning government, the majority shareholder of the steel producer, decided last week to file for a court-ordered restructuring after creditors rejected an initial debt-to-equity swap proposal, according to a source familiar with the matter.

"This is not what investors had hoped for. The recovery rate might be lower than 10 per cent," said the source.

Meanwhile, Sinosteel, with total debt of 100 billion yuan, is reported to be close to carrying out a debt-to-equity swap plan.

Creditors had agreed to swap 27 yuan renminbi of debt into equity convertible bonds of two listed arms of Sinosteel, Caixin reported last week citing anonymous sources.

How Sinosteel will treat holders of its outstanding bonds, however, is still unclear. It has postponed the redemption deadline for its onshore 5.30 per cent 2017s 17 times.