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China debt crunch

Chinese province turns to highway operator to bail out Yongcheng

Henan Transport takes minority stake in coal company that missed bond payments

Henan Transport, a holding company for toll roads and infrastructure assets, will buy a 9.5% stake in Yongcheng Coal and Electricity to rescue the struggling coal miner.   © AP

HONG KONG -- China's Henan Province has lined up a state-owned company to help bring an end to a series of bond defaults by Yongcheng Coal and Electricity Holding Group that have sparked concerns about local government debt around the country.

After first failing to redeem a 1 billion yuan ($153 million) note on Nov. 10 due to what it called a "liquidity problem," state-owned Yongcheng has missed redeeming three other 1 billion yuan notes.

Another 1 billion yuan note was originally to come due on Friday, but for this and the other notes, the company has said holders have agreed to accept half the amount due first while postponing the balance for up to a year. The company met on Wednesday with holders of a note maturing on Dec. 25.

Analysts believe Yongcheng will get help paying back its bondholders through the deal arranged this week by the provincial government. Henan Transport Investment Group, a holding company for toll roads and infrastructure assets, bought 9.5% of Henan Energy and Chemical Industry Group's subsidiary's shares for 3 billion yuan.

That subsidiary, called Yongcheng Coal Group, also known as Yongmei, was about 80% indirectly held by Henan Energy before the transaction.

"The sale of the Yongcheng stake is another example of a local state bailout," said Andrew Collier, managing director of Orient Capital Research in Hong Kong, speculating that Henan Transport is financially stronger than Henan Energy given their respective business focus. "The Henan government called in its chits and ordered a state takeover."

A worker at a coal mine in Henan Province. The China Securities Regulatory Commission has opened an investigation into Yongcheng and its accountant.   © AP

Henan Transport logged a consolidated net profit of 261 million yuan in the first nine months of 2020 despite collecting no highway revenue for almost three months when Beijing waived tolls nationwide to support the economy's rebound from China's pandemic lockdown. It had 4.77 billion yuan in cash as of Sept. 30 and was able to pay interest due Nov. 25 on one of its bonds.

Calling the deal with Henan Transport typical of the "standard playbook of China," Singapore-based financial market analyst Fraser Howie said Yongcheng was "a high-profile failure and the local government clearly can't walk away." He added, "It is such a loss of face."

Yongcheng actually recorded a consolidated pretax profit of 1.1 billion yuan, with 1.47 billion yuan in free cash flow, during the first nine months of the year. It had 32.82 billion yuan of cash as of Sept. 30.

Analysts, though, believe Henan Energy had been drawing out cash from Yongcheng, whose total receivables rose 83% between Dec. 31 and Sept. 30 to 33.93 billion yuan.

Even though no details for the first three quarters have been disclosed, Yongcheng's last annual report suggests considerable portions of its receivables were related to Henan Energy and its affiliates.

"Yongcheng is a good company that is still making profit," said Chen Long, partner at Beijing-based economic consultancy Plenum. "The issue was probably the cash being held by the parent."

The cash infusion from the share sale to Henan Transport will help three of Henan Energy's subsidiaries, which held Yongmei's shares, including Yongcheng Coal itself.

The provincial government replaced Henan Energy Chairman Liu Yingzhi with Liang Tieshan, retired head of another provincial company, on Dec. 11. Henan Energy's Communist Party cell announced the change at a meeting led by Li Tao, head of the provincial branch of the state-owned Assets Supervision and Administration Commission, according to a posting on the company's official account on WeChat. Liu had been identified as head of the party cell as of Dec. 9 on the company's website.

Liu is not the only one under scrutiny in the aftermath of Yongcheng's bond troubles. The China Securities Regulatory Commission has opened an investigation into Yongcheng and its accountant, Xigema Certified Public Accountant.

The National Association of Financial Market Institutional Investors, a government-supervised group for bond market participants, has said it is also investigating Henan Energy, in addition to the roles of Haitong Securities, Industrial Bank, China Everbright Bank and Zhongyuan Bank in the handling of Yongcheng's bonds, as well as China Chengxin International Credit Rating. The association had sent its findings on Yongcheng, which had sold a new bond just 20 days before its first missed redemption, and its accountant to the CSRC.

Vice Premier Liu He sternly expressed "zero tolerance" against any misconduct in the bond market during a high-profile meeting on Nov 21.

It is unclear though whether the cleanup moves will be enough to reassure investors. Pleunum's Chen said it is "little bit too early to say," adding, "Investors will have to see [if] Yongcheng fully repays."

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