A series of bankruptcy filings by major private-sector bond issuers in China’s third-wealthiest province is shining a spotlight on aggressive efforts by local governments to manage unsustainable debt loads.
Four debtors have entered bankruptcy procedures since the start of November in Dongying, a city of 2 million in the eastern province of Shandong that once thrived with a booming tire-making industry. While China sees thousands of bankruptcies each year, instances of court-led restructuring of publicly issued bonds have been rare. Authorities in other cases have encouraged workouts with creditors, raising questions about the Dongying examples.
Shandong SNTON Group Co., an iron-wire maker, entered bankruptcy last month. China Eastar Group, a chemical-products company, also was declared bankrupt last month. Shandong Jinmao Textile Chemicals Group Co. went bankrupt in November. Shandong Dahai Group Co., another textile maker, also went bust in November.
“The recent slew of bankruptcies sent shock waves through the bond market,” said Chen Su, a bond portfolio manager at Shandong’s Qingdao Rural Commercial Bank Co. “For bondholders, they can only expect to get a low repayment ratio through the bankruptcy reorganization – besides which it’s quite a time-consuming process.”
Creditors would prefer direct talks with the company, Chen said. But authorities might have other ideas. Driving their potential concern: the pattern of private-sector companies guaranteeing each others’ debt. The maneuver helped encourage lenders to extend credit, but is now threatening systemic risks as one borrower gets in trouble, infecting others.
In the case of SNTON, local officials have moved to halt the spread of damage, assuming some 80 percent of the guarantees that another Shandong business – China Wanda Group Co. – had extended to SNTON, people familiar with the matter said earlier this week. China Wanda’s 2.4 billion yuan 5.2 percent bond due September 2021 jumped the most on record on Wednesday, according to Bloomberg-complied prices.
SNTON itself was a prolific debt guarantor, to the tune of 3.86 billion yuan (USD575 million), the equivalent of 35 percent of its net assets as of June 2018. China Eastar, which together with SNTON form two of the largest private enterprises in Shandong, extended guarantees amounting to 25 percent of net assets as of January 2018. The two textile businesses also had made guarantees to peers.
That Shandong authorities were apparently comfortable with SNTON and China Eastar entering bankruptcy, yet intervened to alleviate the obligations of China Wanda, illustrates the varied and hard-to-predict decisions of local officials. (China Wanda is unrelated to the entertainment giant Dalian Wanda Group Co.)
Further illustrating the opaque nature of China’s debt market: the circumstances of SNTON’s bankruptcy aren’t entirely clear to creditors. A SNTON official said in a March 22 meeting with bondholders that the company itself wasn’t willing to enter bankruptcy, while declining to respond to questions about whether another entity pressed it to do so, according to people familiar with the discussions. The filing itself identified the company as having initiated the application.
“The local government should have played a role in pushing ahead with the bankruptcies” that have been declared in Dongying, said Shen Chen, a partner at Shanghai Maoliang Investment Management LLP. “It is basically an attempt to get rid of weak firms with excessive external guarantees and focus on keeping those stronger ones safe, otherwise it would be too costly to save them all.”
The Dongying government’s general office didn’t respond to a faxed submission of questions on officials’ approach toward the recent bankruptcies. A representative of the office said it wasn’t clear when the department responsible would reply. Calls to SNTON went unanswered, as did those to Jinmao and Dahai. Eastar declined to comment beyond information disseminated in public statements.
Another aspect of the SNTON bankruptcy raising eyebrows is a sudden change in its reported financial details. The company announced in October that its liability-to-asset ratio was 71 percent at the end of September. However, the court bankruptcy statement from last month shows that same ratio reached 181 percent at the end of November.
Investors in future may now apply greater scrutiny to bond issuers from Shandong — which has a provincial gross domestic product in excess of $1 trillion, behind only Guangdong and Jiangsu — according to Moody’s Investors Service.
“They will be more concerned about the off-the-book risks, as many companies didn’t disclose sufficient information on external guarantees,” said Ivan Chung, head of greater China credit research at Moody’s in Hong Kong. “And it is possible that banks may withdraw credit lines from all related firms regardless of the debtor or guarantor, even affecting those that are financially healthier.” Bloomberg