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China steelmaker default sparks debt contagion fear

China Hongqiao Group Ltd’s dollar bond due 2023 and Shandong Sanxing Group Co’s 2021 dollar bond have both dropped to their lowest levels after Xiwang’s default.

Bloomberg|
Updated: Oct 31, 2019, 08.48 AM IST
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Sanxing’s external debt guarantees were at 626 million yuan, accounting for over 7 per cent of net assets as of September 2018, it said in disclosures in March.
A Chinese company’s bond default is causing market concern that trouble may spread to other firms in the province.

Shandong-based steelmaker Xiwang Group Co’s failure to repay 1 billion yuan ($142 million) of bonds last week, saw investors dump neighboring firms’ notes on contagion fears as companies in this province are well known for providing guarantees for each other’s debt.

China Hongqiao Group Ltd’s dollar bond due 2023 and Shandong Sanxing Group Co’s 2021 dollar bond have both dropped to their lowest levels after Xiwang’s default, according to data compiled by Bloomberg. The bulk of Hongqiao’s bond plunge happened on Wednesday. The company’s bonds didn’t recover much even after it said it won’t help Xiwang Group. The firms are all based in Zouping county.

“Xiwang’s default onshore has raised concerns that other privately owned enterprises in Shandong, particularly those from the same locality, may have been associated with the firm,” said Wu Qiong, executive director at BOC International Holdings in Hong Kong.

Shandong’s privately-owned companies are frequent users of the cross guarantee, which has the potential to send one company’s liquidity issues cascading through the credit system, S&P Global Ratings said in a note last week. “Simply, chained borrowing relationships could send dominos toppling, with a series of companies sequentially unable to fulfil guarantee commitments,” it said.

A Hongqiao unit, Shandong Hongqiao New Material, provided 6.4 billion yuan of debt guarantees to other firms as of March, accounting for more than 11 per cent of its net assets, according to company disclosures in July. Sanxing’s external debt guarantees were at 626 million yuan, accounting for over 7 per cent of net assets as of September 2018, it said in disclosures in March.


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