2 large Chinese borrowers are said to miss bond payments

Two large Chinese borrowers missed payment deadlines this month, underscoring the risks piling up in a credit market that's witnessing the most company failures on record.

China Minsheng Investment Group Corp., a private investment group with interests in renewable energy and real estate, hasn't returned money to bondholders that it had pledged to repay on Feb. 1, according to people familiar with the matter. And Wintime Energy Co., which defaulted last year, didn't honor part of a restructured debt repayment plan last week, separate people said.

The developments are significant because both companies were big borrowers, and their problems accessing financing suggest that government efforts to smooth over cracks in the $11 trillion bond market aren't benefiting all firms. If China Minsheng ends up defaulting, it may rank alongside Wintime Energy as one of China's biggest failures, with 232 billion yuan ($34.3 billion) of debt as of June 30, according to a ratings agency report.

"Chinese corporations' expansion in the past few years has often been fueled by debt issuance, usually short-term borrowings, but their investment cycles are typically longer term," said Shen Chen, a partner at Shanghai Maoliang Investment Management. "The recent failures show that companies are still struggling to roll over their debt despite the recent easing measures."

A liquidity crunch spurred a record 119.6 billion yuan of defaults on local Chinese debt in 2018. While that number is tiny relative to China's economy or outstanding debt, it sent shockwaves through a market where inconsistent government appetite for bailouts and the prevalence of shadow financing can make it hard to tell who's on the hook for losses. The default total will swell again this year, according to analysts.

Investment champion

Shanghai-based China Minsheng Investment didn't repay investors in a 3 billion yuan bond that matured Jan. 29, then pledged to give them their money back three days late, Bloomberg News reported earlier. But that didn't happen, the people familiar with the matter said. China's financial markets were closed last week for the lunar new year holidays, and calls to China Minsheng Investment's financing manager went unanswered Monday.

The firm, one of the largest private investment champions in China, was backed by 59 non-state companies and obtained an operating license in 2014, it said in a November bond prospectus. China Minsheng Investment had 232 billion yuan in total debt and 310 billion yuan of assets as of June 30, according to Shanghai Brilliance Credit Rating & Investor Service Co.

Big defaulter

Wintime Energy told investors that it's still seeking financing to repay 20% of the principal on a 3.8 billion yuan delinquent bond, which was meant to be returned on Feb. 6, said other people familiar with the matter, asking not to be named as the information is private.

The coal miner was China's second-largest bond defaulter in 2018, when it found itself incapable of servicing debt that had quadrupled in less than five years. Calls to Wintime Energy's officer responsible for securities information disclosure went unanswered.

China has been seeking to limit the fallout from its deleveraging campaign by adding cash to the financial system and unveiling stimulus such as increased infrastructure spending, a boon to indebted property and local government borrowers. While that's restored demand for some risky debt, the impact has been uneven.

The yield spread on five-year AA- rated notes (considered a junk score in China) is still more than 300 basis points over top-rated peers; that's more than twice the level of a year earlier, according to ChinaBond data.

The "market is clearly pricing in a lot of credit differentiation as access to refinance remains firmly shut for certain issuers yet widely open for others," said Anne Zhang, executive director for fixed income, currencies and commodities at J.P. Morgan Private Bank. "Defaults will become more frequent yet more idiosyncratic."