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China Energy misses payment on US$350m bond, triggers cross default

Beijing's deleveraging efforts are hitting funding for corporate sector

Hong Kong

CHINA Energy Reserve & Chemicals Group said it hasn't paid a US$350 million bond that matured earlier this month, in the latest example of China's deleveraging campaign choking off financing for some companies.

The oil and gas producer, which has US$1.8 billion of offshore notes outstanding, cited "tightening in credit conditions" for the default. The company plans to suspend this year's interest payments on bonds due in 2021 and 2022 while it considers asset sales and seeks to restructure the notes, China Energy said in a filing that appeared on the Hong Kong exchange on May 27.

China Energy rose to prominence earlier this year when it pulled out of a US$5.2 billion deal to buy a Hong Kong skyscraper from Li Ka-shing's company, after making an unsuccessful bid for Australian oil and gas explorer AWE.

The company's refinancing woes show China's deleveraging efforts are taking a toll on funding for the corporate sector, particularly via a crackdown on shadow financing. The yield spread on three-year AA-rated bonds, considered high-yield in China, over top-rated peers has risen 28 basis points this year to the highest since June 2017.

"The default adds to the jitters for China dollar bonds," said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group. "Access to funding onshore has been restricted for some time and this is now starting to cause stress as companies need to refinance."

The Chinese government is seeking to encourage market-based pricing for credit risk and is tolerating more bond failures. At least 14 publicly issued bonds defaulted in China's domestic market so far this year, compared with 13 in the year-earlier period, according to Bloomberg-compiled data.

China Energy's payment default has triggered cross-defaults on other bonds of the oil and natural gas producer including US$400 million of 5.55 per cent dollar bonds due in 2021, and HK$2 billion (S$342 million) of notes maturing in 2022, according to the company's statement.

Cross-default was also triggered on the company's 2019 notes due in January and November, Lin Jianbang, an executive president at the company, told Bloomberg News on Monday.

The issuer of the 2018 bonds, a wholly owned subsidiary, has remitted accrued interest on those notes, the statement said.

China Energy's offshore unit had expected to receive funds to pay the US$350 million principal on the 2018 bonds from onshore parent by noon on Friday, but the money didn't arrive by then, Mr Lin told Bloomberg News on Friday.

He also said the company was in talks with the trustee of its November 2019 bonds regarding a coupon payment due May 25 but said on Monday that the payment wasn't made.

China Energy expects to continue its business operations as usual, and plans to sell assets to resolve its current cash flow difficulties, according to the statement. The company had cash and equivalents of 10.3 billion yuan (S$2.2 billion) as of the end of June last year, against short-term debt of 3.6 billion yuan and long-term debt of 17.9 billion yuan, according to a December 2017 bond prospectus.

Anne Zhang, executive director for fixed income, currencies and commodities at JPMorgan Private Bank in Asia, said: "This default shows onshore liquidity conditions are really tight and issuers can't get funding from the market or banks.

"I expect investors in China's bond market to have a tough time with more defaults this year. In the short term, industrial names are taking a hit in the offshore market."

Steve Wang, a senior credit analyst at Citic CLSA Securities in Hong Kong, said: "It's giving credit investors a real nightmare on trying to avoid land mines in the Chinese high yield space.

"Spooky signposts ahead: asset sale, coupon suspension, consensual restructuring - things that would appear in a Halloween theme park for bond investors." BLOOMBERG

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