A Chinese solar-cell maker failed to
pay full interest on its bonds, leading to the country’s first
onshore default and signaling the government will back off its
practice of bailing out companies with bad debt.
Shanghai Chaori Solar Energy Science Technology Co. (002506) is
trying to sell some of its overseas plants to raise money to
repay the debt, Vice President Liu Tielong said in an interview
today at the company’s Shanghai headquarters. The company said
March 4 it will only be able to pay 4 million yuan ($653,990) of
an 89.8 million yuan coupon due today.
The number of Chinese companies whose debt is double their
equity has surged since the global financial crisis, suggesting
this first onshore bond default won’t be the nation’s last.
Publicly traded non-financial companies with debt-to-equity
ratios exceeding 200 percent have jumped 57 percent since 2007,
and Chaori Solar may become China’s own “Bear Stearns moment,”
prompting investors to reassess credit risks as they did after
the U.S. securities firm was rescued in 2008, according to Bank
of America Corp.
“There will be more defaults in China’s onshore bond
market,” said Qiu Xinhong, a bond fund manager in Guangzhou at
Golden Eagle Asset Management Co., which oversees 13.9 billion
yuan in assets. “The next default will be likely to happen in
overcapacity industries, such as steel, nonferrous metals and
coal. Bond investors will shun private companies with heavy debt
burdens because they’re the most at risk.”
The yield on Chaori Solar’s bonds due 2017 was at 22
percent before trade was halted on July 8, exchange data show.
Chaori Solar sold 1 billion yuan of five-year notes in March
2012 with a variable annual coupon starting at 8.98 percent,
according to data compiled by Bloomberg. The notes were
downgraded to CCC from BBB+ by Pengyuan Credit Rating Co. in
May, Nomura Holdings Inc. said in a March 5 report.
Chaori’s default, which occurred during the annual session
of China’s legislature, sent a signal that the government is
more willing to tolerate such failures as it seeks to give
market forces a more decisive role in the economy. China should
set up a system for bonds to default, Liu Mingkang, former
chairman of the China Banking Regulator Commission, said today.
“Whenever a default becomes possible, there’s always
either the government or a bank stepping in to coordinate a debt
restructuring,” Liu said in remarks to a session of the Chinese
People’s Political Consultative Conference in Beijing. “There
still isn’t a normal, market-oriented bond default system,
distorting the financial market’s risk allocation functions.”
A default would be a “wake-up call” and advance the
growth of China’s bond market, Moody’s Investors Service said in
a report e-mailed today. It would also “signal regulators’
higher tolerance for corporate bond defaults amid financial
market reforms, which is in line with the current central
administration’s shift to adopt more market-oriented policies,”
Some “zombie” companies in China with cash shortages will
fail as authorities end overly loose monetary policy, Xia Bin,
an adviser to the State Council and former central bank board
member, said on Feb. 10.
Total debt of publicly traded non-financial companies in
China and Hong Kong has surged to $1.98 trillion from $607
billion at the end of 2007, according to data compiled by
Bloomberg. Some 63 have a debt-to-equity ratio exceeding 400
percent, compared with the average of 73 percent. Renewable
energy, materials, household appliances and software companies
dominate the rankings.
Chaori Solar ran into trouble because it expanded into
building solar farms to produce power rather than just
manufacturing panels, which is much cheaper, Wang Xiaoting, a
Beijing-based analyst at Bloomberg New Energy Finance said today
by phone. Most surviving solar companies have become more
cautious about expansion, she said.
According to the 2012 prospectus for Chaori Solar’s notes,
China Guangfa Bank Co.’s Shanghai branch and China Citic Bank
Corp. (998)’s Suzhou branch agreed to extend 800 million yuan in loans
to Chaori Solar if the company faces a temporary cash squeeze.
Chaori Solar also has $100 million of insurance against trade
receivables to help meet repayments, according to the sale
The prospectus, posted on the website of Shenyin Wanguo
Securities Co., also says investors in the notes can ask the
entrusted bond manager, China Securities Co., to force Chaori
Solar to make payments, and participate in any reorganization or
insolvency proceedings. Chaori Solar must explain its situation
in writing to the entrusted bond manager if it can’t make
interest payments and if the default lasts longer than 30 days.
“We may see other bonds default this year,” said Li Ning,
a bond analyst in Shanghai at Haitong Securities Co., the
nation’s second-biggest brokerage. “If it’s a default by a
financial institution, it may turn into an extreme situation
somewhat like the collapse of Lehman Brothers.”
Calls to officials at China Citic Bank in Suzhou weren’t
answered today. Calls to China Guangfa Bank’s Shanghai branch
after office hours yesterday also weren’t answered. Liu said the
company is in talks with both banks about liquidity assistance.
China Citic Bank won’t help Chaori Solar make any interest
payment on its bonds because they weren’t guaranteed, the 21st
Century Business Herald reported March 6 on its website, citing
an unidentified person from the lender. An earlier liquidity
support agreement between the bank and the company can’t be
interpreted as a bond guarantee, the report said.
“This will likely be the first of many defaults, although
I don’t think it’s going to cause a cascading effect,” said
Brian Coulton, a global emerging-market strategist in London at
Legal General Investment Management, which manages some 450
billion pounds ($753 billion) globally. “Short term, we’re
likely to see higher bond yields but in the long term, this will
create a better market for pricing credit risk.”
The yield on five-year AA- notes rose eight basis points to
7.77 percent on March 5, the most in almost four months. Yields
rose a further five basis points to 7.82 percent yesterday.
Ratings of AA- or below in China are equivalent to non-investment grades globally, according to Haitong.
Industries with overcapacity such as solar, steel and
shipbuilding are struggling under the weight of higher borrowing
costs. The premium of five-year AA- bonds over similar-maturity
government securities widened to 361 basis points on March 6
from near a three-month low of 349 on March 4 before Chaori
Solar’s first statement.
Renewable energy firms issued $8.1 billion of debt in 2013
and a record $9.6 billion in 2012, data compiled by Bloomberg
show. Chaori Solar reported a net loss of 1.33 billion yuan for
2013, its third straight annual earnings deficit. It avoided a
default last year around the same time.
Companies in China have postponed or delayed at least 6.6
billion yuan of bond sales over the past three days, according
to data collected from ChinaBond, China Money and Shanghai
Clearing House websites.
Four pulled domestic notes sales on the Chaori Solar news.
Suining Chuanzhong Economic Technology Development Co. will
delay a 1 billion yuan offering due to “serious fluctuations in
the bond market,” it said on ChinaBond’s website March 5.
Taizhou Kouan Shipbuilding Co., Xining Special Steel Group and
Qunsheng Group Co. scrapped offerings for similar reasons.
People’s Bank of China adviser Chen Yulu said today that
default risks for trust products in the country are under
control and aren’t systemic, the official Xinhua News Agency
“This is the first default in a relatively new bond market
with limited spillover effects,” Hans Stoter, the chief
investment officer at ING Investment Management Co., said in an
interview in Singapore today. “It’s an important test to see
the workout process and what losses will be incurred by domestic
investors. We’re watching with great interest.”
To contact Bloomberg News staff for this story:
Judy Chen in Shanghai at
David Yong in Singapore at
To contact the editor responsible for this story:
Katrina Nicholas at