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China suffers first dollar-bond default by SOE in two decades

Debt plan for commodities trader Tewoo spotlights credit risks as economy slows

Beijing risks facing further defaults by state-owned enterprises as China's economy slows.   © Reuters

HONG KONG -- Bondholders of commodities trader Tewoo Group accepted heavy losses as part of a debt restructuring plan, in a move S&P Global Ratings dubbed the first offshore default in two decades by a Chinese state-owned company.

The restructuring of bonds issued by Tewoo, which is based in the northern port city of Tianjin, underscores the credit risks ahead for China as a slowing economy curtails the ability of state-run enterprises to meet principal and interest payments.

"This is another sign of changing times," S&P said in a statement. "It has crushed the long-held myth by many market participants that SOEs, no matter how weak, will be bailed out by their government masters."

"Governments simply don't have the means to support all SOEs amid a weakening economy and falling tax revenues," the ratings agency said. "We believe bailouts will be increasingly selective, leading to more defaults."

Though state-owned companies have defaulted on onshore bonds since 2015, investors have assumed that China would backstop its corporate enterprises and prevent an offshore bond default. That assumption is changing as record volumes of high-yield debt come due over the next two years, just as China's economy slows and policymakers continue to deleverage.

Investors representing 57% of Tewoo's total $1.25 billion offshore debt agreed to be paid between 37 cents and 67 cents on the U.S. dollar, Tianjin State-Owned Capital Investment and Management said in a filing. The state asset manager is Tewoo's offshore bond manager.

Holders representing 22.6% of the bonds outstanding agreed to exchange their debt for new bonds issued by the state asset manager. The new bonds offer lower coupons and extend the maturity. The remaining bond owners did not submit their choice before the deadline Monday.

The settlement of the debt restructuring offers is expected to occur on or around Tuesday, Tianjin State-Owned Capital Investment and Management said.

The debt restructuring plan, the first by an SOE in the U.S. dollar bond market since Guangdong International Trust and Investment defaulted in 1998, was put together ahead of a $300 million bond maturity coming Monday. The bonds were among four securities covered by the plan, and the asset manager said last month Tewoo was likely to default on these notes.

The process can be viewed as a precursor to resolving future SOE debt crises, with S&P Ratings saying other local governments with deteriorating fiscal profiles might struggle to support their companies. Since 2018, the credit ratings agency has taken 21 negative ratings actions on SOEs to reflect weakening government support.

In February and August of this year, Qinghai Provincial Investment Group defaulted on interest payments, but S&P said it did not consider this action a default because the company managed to complete the payment within five business days.

Tewoo operates across chemicals, mining, autos and logistics. The magnitude of its financial difficulties became clear in April when the company sought a debt extension from its banks and sold some of its copper holdings below market price.

Tianjin State-Owned Capital Investment and Management, owned by the Tianjin municipal government, was appointed to manage the company's offshore debt last month. In November, the company said it would be unable to pay interest on a $500 million bond.

Industrial & Commercial Bank of China then stepped in to transfer the interest to bondholders on the company's behalf and also gave a guarantee on the note.

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