Shanghai: Local government officials have a bailout plan to ensure that an insolvent fibre producer can repay 400 million yuan (Dh233 million) in commercial paper, avoiding what would have been the first corporate default in the history of China's bond market, official media said on Friday.
The official China Securities news quoted unidentified officials from the Weifang city government, in eastern China, as saying they would ensure that Shandong Helon will be able to pay all principal and interest due on April 15, when the company's one-year paper matures.
Traders say a government rescue of Shandong Helon would support corporate bond prices in the short term, avoiding a flight to quality and associated spike in yields for lower-rated issues that would follow a potential Helon default.
But in the long term, a bailout of the company — whose consolidated liabilities exceed assets by 276 million yuan — will hinder the development of a genuine, risk-based credit pricing in China's bond market, traders say.
"From a broad perspective, if a company like this doesn't default, then China doesn't have a credit-bond market," said a Beijing-based bond trader.
"Credit bond" is the term that Chinese market participants use to describe bonds with a non-negligible risk of default. The term excludes government bonds or bonds issued by sovereign entities such as policy banks.
If Helon's paper does pay out as scheduled, investors who bought their bonds at deep discounts, betting that the government would step in, "will be walking on air," the trader said. Helon's paper was yielding 379 per cent at midday Friday.
Weifang officials say that Helon's large number of shareholders, debt holders, and estimated 7 billion yuan in debt mean that dealing with the problem is a important for maintaining social stability, the paper reported.
Slowing economy
China's economy is slowing, adding to fears that more debt may go sour, and a once-in-a-decade leadership transition is scheduled for later this year.
Analysts also see stability as the key issue.
"The concern is always that if you have retail investors outside the door of CSRC, saying ‘where is my money? where is my interest payment?' that worries the CSRC," said Fraser Howie, chief executive of brokerage CLSA in Singapore and co-author of a book on China's financial system, "Red Capitalism," referring to the China Securities Regulatory Commission.
As Helon's debt problems have worsened over the last year, the government has acted to ensure that normal production continues at the company, which makes artificial fibres and yarns which used in clothes and a variety of other textiles.
The government has invested around 1.7 billion yuan in the company through loan guarantees and a state-owned financing platform set up to operate the company on a contract basis, the paper reported.
Helon's production line at its Weifang headquarters is currently operating at more than 80 per cent capacity.
But Weifang has not pledged unlimited support. Officials also reportedly said that while it will ensure that Helon does not default on its paper, the city government lacked the resources to repay all of Helon's other outstanding debt.
Helon currently has at least 879 million yuan in overdue bank loans, equal to 557 per cent of the parent company's net assets, according to a March 23 company disclosure.
Several of its creditor banks, including China Everbright Bank, China Merchants Bank, and Shenzhen Development Bank, have sued the company for repayment of outstanding loans.
On Friday, Helon's stock resumed trading in Shenzhen, where its shares had been suspended since last August. The shares traded at 4.58 yuan around midday Friday, down from 4.82 on August 19, 2011.
