Economy | Borrower’s USD11 billion debt mountain comes crashing down

China this month recorded one of its biggest corporate-debt defaults yet, with the downfall of a coal miner that had ridden the country’s wave of credit until policy makers changed the game with their deleveraging campaign.

For investors in Wintime Energy Co., it’s been far from a winning time now that the company from northern Shanxi province is proving incapable of rolling over debt that quadrupled in less than five years. How the borrower ran up a 72.2 billion yuan (USD10.8 billion) tab that it now can’t make good on illustrates why this year will be China’s worst yet for corporate defaults. And with a potential lifeline from state-owned banks unveiled yjis week, it could also emerge as an example of China’s unwillingness to allow unbridled corporate failures.

Wintime’s original plan was to borrow to fund acquisitions and expand into areas including finance and logistics. As borrowing costs tumbled from 2014, funding was easy to get and the miner took full advantage of creditors’ largesse. Things started changing in 2016, when President Xi Jinping began putting emphasis on reining in financial risks.

Now, Wintime has the unfortunate distinction of being the largest defaulter in China so far in 2018, delinquent on 11.4 billion yuan of securities after it failed to pay a local bond this month.

China’s changing environment for financing has had quite a big impact on the company, an officer with Wintime’s information disclosure department said by phone, declining to be identified by name. The firm is trying to raise new debt to repay existing obligations and is selling assets, he said, declining to comment on Wintime’s past run-up in debt.

That run-up came amid a near-doubling in size of China’s domestic bond market, now roughly $12 trillion and the world’s third largest. The government had encouraged companies to use bonds for financing as they embraced financial innovation to make the economy less dependent on state-owned banks.

The trouble was that local buyers had little experience in doing credit research, and the local debt-rating agencies lacked the kind of differentiation among borrowers found overseas. There was little need for due diligence until China began allowing defaults in 2014.

“China’s economic growth was largely driven by debt and its corporate debt looks like a Ponzi scheme,” said Qin Han, chief fixed income analyst at Guotai Junan Securities Co. “More firms may give up on repaying debt if they encounter financing difficulties.”

With authorities taking measures to curb leverage by clamping down on shadow financing, boosting money-market borrowing rates and tightening regulations on the asset management industry, companies are increasingly running into those difficulties.

The increasingly difficult environment can be seen in Wintime’s history. After issuing more than 10 billion yuan of bonds in 2016 and again in 2017, it was only able to find buyers for 3.6 billion yuan so far this year, Bloomberg-compiled data show. That’s as its borrowing cost for one-year bonds soared to 7 percent in 2018 from 4.5 percent in 2016. Bloomberg