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Chinese coal miner accused of violations in bond sales

Yongcheng's note holders agree to extended payment with state-owned company

HONG KONG -- A Chinese state-owned coal miner is accused of wrongdoing in a bond issuance that has sparked turmoil in the mainland's financial market.

An investigation of Yongcheng Coal and Electricity Holding Group's issuance of a 1 billion yuan ($152 million) short-term note found evidence of "violations of laws and regulations," the National Association of Financial Market Institutional Investors alleged on Tuesday.

The note did not get redeemed at the original deadline of Nov. 10.

The association, an industry group of interbank market participants under the jurisdiction of the People's Bank of China, referred the case to the China Securities Regulatory Commission and also will pursue its own disciplinary action against Yongcheng.

Meanwhile, Yongcheng said Tuesday evening that bondholders have agreed to an extended payment arrangement.

All 31 bond owners consented during a meeting Monday night and by online voting by Tuesday evening to a plan in which half of the principal will be paid upfront, with the rest settled in 270 days from the original maturity date. The miner made the interest payment a few days after missing the initial deadline.

The unanimous agreement was needed for the new repayment arrangement to be valid. The new deal technically could reverse the credit event from being a default.

The Yongcheng case is widely viewed as one of the incidents that have aggravated investor sentiment in China's onshore bond market since late October, along with defaults by Huachen Automotive Group and chipmaker Tsinghua Unigroup. Huachen entered into bankruptcy restructuring proceedings on Friday.

The matter has drawn attention from high levels of China's government, as Vice Premier Liu He called a meeting of the Financial Stability and Development Committee on Saturday. Liu stressed the need for "zero tolerance" against misconduct to preserve "fairness and order in the market," according to the official state media report on Sunday.

"The day after regulators pledge 'zero tolerance,' Yongcheng somehow finds the money to repay," Anne Stevenson-Yang, co-founder and research director at J Capital Research, tweeted Tuesday night. 

The interbank association responded harshly to Yongcheng, as the company's missed payment on Nov. 10 came only 20 days after floating a separate three-year bond.

Since opening the probe Nov. 12, the association has expanded scrutiny to include financial institutions, credit agencies and accountants involved in the Yongcheng bonds, as the mainland's overall credit environment deteriorates further.

Haitong Securities, Industrial Bank, China Everbright Bank and Zhongyuan Bank were noted by name, along with China Chengxin International Credit Rating and the Xigema accounting firm. But it is unclear whether they also were referred to regulators on Tuesday.

But the association said Tuesday it also has opened a case against Yongcheng parent Henan Energy and Chemical Industry Group, one of the largest state-owned companies in Henan Province. The industry group alleged that it detected regulatory violations during its investigation of the subsidiary.

Henan Energy's credit profile has come under the spotlight lately, as the company holds cross-protection clauses with Yongcheng on outstanding bonds. Yongcheng accounted for 59.9% of the parent's total assets, 26% of revenue and 486% of pretax profit in 2019.

Yongcheng's debt crisis is far from over. The company failed to repay the principal and interest on two 1 billion yuan short-term notes Monday, and it faces another 3 billion yuan in bond maturities by year-end.

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