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China tech

Chinese chipmaker Tsinghua Unigroup's bonds crash after debt warning

Beijing tech flagship strained by credit-fueled capacity buildup

Tsinghua Unigroup plays a leading role in building up China's semiconductor industry in order to reduce reliance on foreign chipmakers. (Photo by Cheng Ting-fang)

HONG KONG -- Listed bonds issued by China's Tsinghua Unigroup plunged on Tuesday after a local credit agency raised alarm on the state-backed tech conglomerate's mounting debts to finance investments meant to counter U.S. pressure.

Prices of three of Tsinghua Unigroup's yuan-denominated bonds listed on the Shanghai Stock Exchange fell between 15% and 37%, becoming the biggest decliners and most volatile issues among the corporate debt traded on the bourse that day.

What triggered the collapse was a warning on the group's overall debt level by Beijing-based China Chengxin International Credit Rating, or CCXI. The agency said on Nov. 5 that it had placed Tsinghua Unigroup under watch for a possible downgrade from its current triple-A rating.

Chinese agencies typically give domestic issuers high ratings and rarely downgrade them. When ratings are cut, the market impact can be substantial.

The main reason that the rating agency raised was the deterioration of the group's overall financial standing. "At the moment, the pressure on the company's capital expenditure from its projects under construction is relatively large, while the previous large acquisitions resulted in high level of liabilities," the agency said in a report.

Tsinghua Unigroup's total liabilities stood at 52.78 billion yuan ($7.97 billion), over 60% of which is short-term, at the end of September, compared with a cash level of 4 billion yuan, according to the agency. The company faces 1.3 billion yuan and $450 million worth of debt maturing by the end of the year, with another 5.1 billion yuan and $1.05 billion of bonds to either mature or to be bought back during the first half of next year.

Expecting a high tide of repayments, the company on Oct 30 decided not to exercise the redemption rights for a perpetual bond issued in 2015. This alleviated the payment pressure for the time being, but it resulted in increasing the coupon rates for the next five years. CCXI said the action "could create a negative effect on the company's finances and further push up the borrowing costs, which will add more pressure on liquidity and weaken the refinancing ability."

Tsinghua Unigroup is a key driver in establishing Chinese manufacturing capabilities for key high-tech components, such flash memory chips and DRAM. These parts are indispensable for smartphones and other devices, and their significance for China's economy is only rising under tensions with Washington.

Yangtze Memory Technologies -- the group's flash memory chip production arm, which runs a plant in Wuhan -- has expanded production capacity even during the pandemic. The group is constructing a flash memory factory in Chengdu, and has recruited Yukio Sakamoto, former CEO of Japanese DRAM maker Elpida Memory, as its senior vice president to bring in expertise for building a new plant in Chongqing.

CCXI noted that Tsinghua Unigroup "sustains a leading position" in the tech industry and "receives vigorous external supports in developing its chip business." The company obtains solid support from the state on strategically important technological investments, but the financing part stood out as a big question.

In a statement Monday in response to the agency's claims, Tsinghua Unigroup said "the company is operating normally, and the said matters [by CCXI] do not engender significant influence on company's ability to repay the debts."

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