This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Chaori Default Shifts Chinese Bonds Landscape

NEW YORK (The Deal) -- China witnessed its first domestic bond default Friday when solar equipment maker Shanghai Chaori Solar Energy Science & Technology failed to make a full payment on an 89.8 million renminbi ($15 million) coupon.

The default, though small, is significant as it is the first time China's state-backed lenders have failed to backstop the onshore bonds of one the country's many heavily indebted, listed businesses.

"Over the past few years, municipal governments and banks in China have stepped in to help distressed companies meet their bond payment obligations," noted Moody's Investors Service Ivan Chung on Friday. "These bailouts have led some investors to overlook the fundamental credit risks in bonds."

Loss-making Chaori said on Thursday that it planned to pay about Rmb4 million ($654,000) of the Rmb89.8 million coupon on a Rmb1 billion bond due in 2017. The company blamed an inability to raise new funds for its failure to pay the full bond coupon.

The default comes just over a year after Chaori narrowly avoided default when a Shanghai local government convinced the solar company's bank to extend the terms on overdue bank loans.

The default will raise the importance of Chinese companies' risk profiles, introduce more accurate pricing of company debts and encourage more efficient capital allocation by the bond markets, according to Chung.

China's onshore bond market lacks many of the safeguards that western markets take for granted, including bond covenants, while bondholder-recovery mechanisms are untested. Despite those deficiencies Chinese corporate bonds have proven a popular investment, largely because of the perception that they were underwritten by the state. China's corporate debt market was worth $12 trillion at the end of 2013 and could reach $13.8 trillion in 2014, leapfrogging the U.S. as the world's largest debt market, said Standard & Poor's.

The default could be the first of many among small and midsized Chinese companies, according to some analysts, who predict the Chinese government will allow defaults in sectors with significant overcapacity, such as solar panel producers and steel manufacturers.

Chaori bonds are rated CCC. They have been suspended since July after the company posted its second consecutive yearly loss.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AAPL $132.04 1.87%
FB $80.55 1.53%
GOOG $539.79 1.40%
TSLA $247.43 -0.01%
YHOO $43.38 1.24%

Markets

DOW 18,162.99 +121.45 0.67%
S&P 500 2,123.48 +19.28 0.92%
NASDAQ 5,106.5930 +73.8420 1.47%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs