Winter comes to China shipyards facing near-record maturing debt

[SHANGHAI] China's shipyards and shipping firms face a year of near-record bond repayments, stoking speculation debt failures will spread as the economy slows.

The companies must repay 50.3 billion yuan (S$10.9 billion) of notes this year, the second highest ever after an unprecedented 54 billion yuan in 2015, data compiled by Bloomberg show.

Sainty Marine Corp, the biggest shipyard in Jiangsu province, said on Dec 23 it had 542.9 million yuan of overdue borrowings. Zhoushan Wuzhou Ship Repairing & Building Co in December became the first state-owned shipbuilder to go bankrupt in a decade, according to Minsheng Securities Co.

"Winter has come to the whole Chinese shipbuilding industry," said Xiang Feiyan, a bond analyst at Zhong Tai Securities Co in Shanghai.

"Default risks for smaller shipbuilders are high while they are struggling with the slumping economy and the government's curb on overcapacity."

Premier Li Keqiang is allowing mergers and acquisitions to consolidate the industry as he seeks to boost international competitiveness. Regional peers are also struggling as the weakest Chinese economy in a quarter century curbs demand, with Korean authorities calling for asset sales after operating losses mounted at the world's three biggest shipyards.

DEMAND SLUMPS

China's new ship orders tumbled 59 per cent in the first 11 months of 2015 from a year earlier, according to data released by China Association of the National Shipbuilding Industry on Dec 15.

Profits at manufacturers for the shipping industry dropped 28.5 per cent in the 10 months through October.

The industry hardship comes amid a slide in the nation's equities and currency this year, and after at least seven companies reneged on obligations in 2015 amid the worst economic slowdown in a quarter century.

The yield premium on the country's top-rated corporate notes over similar-maturity government bonds has fallen six basis points this week, set for its biggest weekly decline in two months.

China Bond Rating Co, a Beijing-based credit assessor, said Sainty Marine and Evergreen Holding Group have the highest default risks among shipbuilders.

Investors in Sainty Marine's 2019 bonds have an option to sell the 780 million yuan of notes back to the issuer on Sept 18. Evergreen Holding's 400 million yuan of securities will mature on May 15.

Yu Pingfeng, a finance official at Evergreen, said the company will repay the bonds on time. An official at Sainty Marine's investor relations department, who wouldn't give her name, declined to comment.

FAILURE WATCH

Sainty Marine suffered a 397.5 million yuan loss in the third quarter, compared with a shortfall of 0.2 million yuan a year earlier, according to Bloomberg data. Its total liabilities of 8.3 billion yuan exceeded its 7.8 billion yuan of assets as of Sept 30.

"We may see the first bond default in the shipbuilding industry this year," said Zhong Tai Securities' Xiang.

"But we can't exclude the possibility local governments may step in if the troubled company's fall would have a big impact on local employment or the economy."

Jiangsu Guoxin Investment Group Ltd, a state-owned investment company, provides a guarantee for the 2019 debentures issued by Sainty Marine, according to its prospectus.

At a meeting late last year, bondholders urged the shipbuilder to disclose a comprehensive repayment plan and redeem some of the notes before the due date, according to a Dec 29 company statement.

RATINGS CUT

"At the bondholder meeting, Guoxin expressed strong willingness to bail out the Sainty Marine bond," said Wei Yuanyuan, a bond analyst at China Bond Rating in Beijing.

"Whether Sainty Marine will default will depend on whether it can get external support."

Pengyuan Credit Rating Co on Dec. 4 downgraded Sainty Marine's issuer rating to B from BB, citing sluggish demand and financial losses. The yield on its 2019 bonds was at 6.82 per cent before trading was halted from Aug 6, according to exchange data.

Evergreen Holding had a loss of 407.6 million yuan in the first nine months of 2015, compared with profit of 321.8 million yuan a year earlier, according to a company statement.

The yield on its 2018 debenture climbed 66 basis points this week to 12.12 percent, exchange data show.

"There have been an increasing number of shipbuilders going bankrupt since 2012," said Ms Wei at China Bond Ratings. "As the industry is cutting capacity we may see more bankruptcies or credit events."

BLOOMBERG