China energy firm CEFC defaults after Rosneft deal fails

As corporate defaults pile up in China’s onshore bond market, a unit of a once-promising energy conglomerate with USD4.8 billion of debt and a checkered past said it won’t be able to meet its payment obligation yesterday.

CEFC Shanghai International Group Ltd., a unit of the privately-held CEFC China Energy Co., failed to repay 2 billion yuan ($313 million) of bonds but said it will seek to pay back the notes in six months, according to a statement on the Shanghai Clearing House website. The unit said a week ago it may not be able to repay the notes because its chairman’s failure to “fulfill normal responsibilities” had a huge impact on the company’s operations.

Worries among investors about surging default rates in China are deepening after at least four nonpayments in the onshore market over the past month. Given the magnitude of the CEFC’s debt load, market stability will hinge on how it implements a debt workout plan, according to Fitch Ratings.

CEFC’s rise and fall mirrors some of China’s other sprawling, acquisitive private companies under pressure by President Xi Jinping’s crackdown on risky loans and capital outflows. The firm’s rapid ascent peaked with its agreement in September to buy a $9 billion stake in Russian oil behemoth Rosneft PJSC. That deal fell apart this month as financial troubles emerged after its chairman, Ye Jianming, came under investigation by Chinese authorities and stepped down from management.

The company relied heavily on bond sales for funding over the past two years and its borrowing costs have jumped since Ye was put under investigation, shutting it out from funding in this market. Two calls each to CEFC Shanghai representatives and the general line of its parent company went unanswered.

CEFC racked up its debt pile through a series of ever-bigger deals in recent years for energy and finance assets across Eastern Europe and the Middle East, as well as in China. The non-payment Monday will immediately trigger a cross default on its $250 million dollar notes, according to a bond offering circular seen by Bloomberg, and also raise uncertainty on the rest of its outstanding debt.

“The market is generally expecting that CEFC probably won’t repay the bond due today,” said Wang Ying, a senior director at Fitch Ratings in Shanghai. “Given that CEFC has a huge amount of outstanding bonds, an orderly and transparent debt restructuring is required to provide fair compensation to investors and to maintain market stability.”

China’s increased tolerance for company defaults comes as the government steps up efforts to curb leverage and rein in regional borrowings. Finance costs for weaker companies are on the rise. Yield premium of one-year AA- rated bonds over AAA rated notes widened 55 basis points this quarter, the biggest increase since 2015. S&P Global Ratings said defaults by private companies won’t necessarily trigger systemic risks so they won’t shake the government’s resolve to curb leverage.

“If you want to take real efforts to curb corporate deleverage, you will certainly go through pains and face losses,” said Christopher Lee, managing director of corporate ratings at S&P in Hong Kong.

Some of the CEFC’s creditors saw a glimmer of hope after it repaid an overdue 85 million yuan of debt sold on Phoenix Finance, a local Internet finance platform ahead of a deadline last week. CEFC has a total of 30.8 billion yuan of outstanding bonds, including the $250 million dollar bond due in November.

Creditors to CEFC China Energy have formed a committee to review its asset disposals amid rising pressure to repay debt. The conglomerate’s largest creditor, China Development Bank, will lead the committee that will play an active role in the restructuring of debt and asset disposals, people familiar with the matter had said in March. Any final decisions will be taken by the Shanghai government, which has taken control of the company, the people said.

Separately, Czech financial group J&T Private Investments has decided to take control of the management of the CEFC Europe because of the failure of the parent company to repay debt on time, China’s official Xinhua News Agency reported May 19. CEFC Europe is a Czech-based European branch of the Chinese conglomerate CEFC China Energy. Bloomberg