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Caixin

China's Hongda Xingye misses debt payment but avoids default

Cancellation of bonds stirs controversy with some market participants

Chinese chemical producer Hongda Xingye Group failed to repay 950 million yuan ($145 million) of bonds that were due Monday but found a way to avoid being labeled a defaulter.

A day before the debt matured, Guangzhou-based Hongda Xingye held an urgent meeting with 12 institutional holders of the 270-day ultrashort-term bonds. More than 90% of the holders voted to cancel registration of the bonds and accept repayment sometime later under separate agreements, according to a Hongda Xingye executive.

As a result, the company technically avoided a default, the executive said. The official said the company will apply to the Shanghai Clearing House to cancel the bonds as soon as possible, but did not divulge when the bondholders will be paid.

Amid a new wave of defaults in China, the maneuver stirred controversy. Some bond industry participants maintained that failure to repay on the due date was a default. The status of the Hongda Xingye debt was shown as defaulted on Wind, a financial information database. But a senior bond market participant said off-market repayment or conversion of bonds into general debt is not a default.

"As the bonds no longer exist, it's up to the issuer and bondholders to decide whether the creditors' rights continue," the bond market participant said.

The failure to pay on time did not catch the market completely by surprise. Hongda Xingye Chairman Zhou Yifeng had been cooperating with a corruption investigation of an Inner Mongolia official, which caused liquidity at the company to tighten as concerned lenders were unwilling to provide credit, according to a person close to the matter.

Hongda Xingye, an AA+ rated issuer, is the parent of Shenzhen-listed Hongda Xingye. The parent holds about 39% of the unit's equity. After the failure to repay the debt, the unit's shares plunged by the 10% daily limit on Tuesday, soon after the market opened.

As of Monday, the parent company had a total of eight bonds with an outstanding amount of 4 billion yuan. It also has 1.3 billion yuan of midterm notes due in a month. The executive said the company is trying to raise funds through various means and communicating with creditors.

As of Monday, Chinese companies have defaulted on 155.6 billion yuan ($23.8 billion) of bonds this year, surpassing last year's full-year record of 149.6 billion yuan and 120.9 billion yuan in 2018, according to Wind.

China's spate of bond defaults is attracting more institutional investors looking to cash in on the higher yields that typically accompany the securities known as junk bonds. Bonds in default can generate big returns if their issuers eventually pay them off -- so long as investors buy in at a bargain price.

Wang Juanjuan, Zhu Liangtao and Tang Ziyi contributed to this report.

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Read also the original story.

Caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Nikkei recently agreed with the company to exchange articles in English.

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