Creditors seek bankruptcy restructuring for Dongbei Special Steel

[SHANGHAI] Fushun Special Steel said on Friday a court is reviewing an application from creditors for a bankruptcy restructuring of parent Dongbei Special Steel Group.

Fushun Special Steel said in a statement on the Shanghai stock exchange website that its own operations and capital flows were normal. State-owned steelmaker Dongbei Special Steel, an unlisted company, owns 35.22 per cent of Fushun.

The announcement comes as the corporate bond market, which suffered a steep sell-off this spring, is again trading near multi-year highs despite ongoing defaults and rising concern over the scale of China's corporate debt problems.

Dongbei, which is owned by the Liaoning provincial government in the country's northeast, has been at the heart of the debt market's troubles this year. Its first bond default in late March helped trigger a sharp sell-off in corporate debt as investors reassessed the likelihood of bailouts for key provincially-owned state enterprises, especially in coal and steel sectors hobbled by overcapacity.

The firm, which has defaulted on nine separate bonds in 2016, has also been involved in an extended struggle with creditors over how to restructure its debt, according to Reuters IFR and other media publications. Dongbei Special Steel could not be reached for comment.

Dongbei had reportedly proposed a debt-to-equity swap as a partial solution to the problem, but creditors objected.

In July, creditors took the unusual step of urging one of Dongbei's main underwriters, China Development Bank, to ask regulators to temporarily bar Liaoning province from further debt financing.

China Development Bank said later that it would continue to support the economic development of Liaoning.

On Sept 28, the Economic Observer said Dongbei Special Steel had ironed out a business revival plan and was seeking government support for its debt restructuring.

With the disclosure that Dongbei creditors are seeking a bankruptcy restructuring, the status of those plans is unclear.

A court-managed bankruptcy process will not necessarily end in liquidation, but analysts said the recent court-ordered liquidation of Guangxi Nonferrous Metal Group, another provincially-owned enterprise, sets a worrying precedent.

Several state-owned issuers have defaulted on their obligations, however investors have yet to suffer heavy principal losses on a public bond until now. Some borrowers have managed to repay bondholders in full after securing funding elsewhere, while others have extended their maturities. In some cases, negotiations remain ongoing.

The Guangxi Nonferrous case may change that, analysts said. "Bondholders of Guangxi Non-Ferrous Metals are likely to take a haircut," said Ying Wang, senior director of corporate ratings at Fitch.

REUTERS