Chinese defaults increase as cement maker set to miss bond payment

A Shanshui Cement factory in Liaocheng in 2004.
A Shanshui Cement factory in Liaocheng in 2004.PHOTO: REUTERS

SHANGHAI (BLOOMBERG) - China is headed for its latest corporate default amid slowing economic growth, as a cement maker said it will fail to pay bond investors and will file for liquidation.

China Shanshui Cement Group Ltd "will be unable to obtain sufficient financing on or before" a Thursday (Nov 12) maturity date on its two billion yuan (S$446 million) of 5.3 per cent securities, it said in a statement on Wednesday (Nov 11). 

The company, which is incorporated in the Cayman Islands, has decided to file a winding up petition and application for appointment of provisional liquidators with the courts there, it said. That "will also constitute an event of default" on its US$500 million (S$710 million) 7.5 per cent dollar bonds due 2020, according to the filing.

Investors have been scarred by defaults from Chinese firms this year in industries including property and commodities, as President Xi Jinping shifts towards greater reliance on services to drive growth amid the weakest economic expansion in a quarter century.

Shanshui will be at least the sixth company to renege on obligations in the nation's onshore bond market this year, after Shanghai Chaori Solar Energy Science & Technology Co became the first in 2014.

"For offshore creditors, recovering value from Shanshui's dollar bonds will be a long process given that onshore creditors will be all over the company first in the case of liquidation,'' said Mr Zhi Wei Feng, credit analyst at Standard Chartered in Singapore.

The company's 2020 dollar debentures slid 24 cents to a record low 58.5 cents as of 9.44 am in Hong Kong.

Shanshui has been mired in a shareholder fight for control since April amid President Xi's call to cull weaker firms in industries grappling with overcapacity. Its largest shareholder Tianrui International Holding Co has been trying to change Shanshui's board.

Meanwhile its two other shareholders China National Building Material Co and Taiwan's Asia Cement Corp have announced they are considering the terms of a possible offer.

"Shanshui's default is mainly because of the fight among shareholders," said bond analyst Sun Binbin of China Merchants Securities Co in Shanghai.

Defaults in China's local corporate bond market have mounted this year. Sinosteel Co last month failed to pay interest on two billion yuan of notes maturing in 2017. Baoding Tianwei Yingli New Energy Resources Co, whose majority holder was until last year the world's biggest solar panel company by shipments, failed to make a complete payment on a note due Oct. 13.

Shanshui is "playing with fire with disregard for all stakeholders", said Mr Leong Wai Hoong, a senior Asian high-yield bond manager in Singapore at Nikko Asset Management Co, who has sold all holdings in the cement maker from funds under his management. "There are lessons here on the quality of management and the cost of shareholder tussles."