Shanghai Chaori Solar Energy Science
Technology Co. said it may not be able to make an 89.8 million
yuan ($14.6 million) interest payment in full on March 7, in
what would be the first default of an onshore bond.
The maker of energy cells to convert sunlight into power,
plans to pay 4 million yuan to bondholders, the company said in
a statement to the Shenzhen stock exchange yesterday. The stock
has dropped 41 percent over the past 12 months to 2.59 yuan a
share before trading was halted on Feb. 19.
A default would highlight strain in China’s $4.2 trillion
bond market after a trust product issued by China Credit Trust
Co. was bailed out in January. China’s renewable energy industry
faces a record $7.7 billion in bonds maturing this year, testing
the resolve of Premier Li Keqiang who needs to allow industry
consolidation to slow a buildup of debt in the economy estimated
by a state think tank to account for 215 percent of gross
“This is the first onshore default,” said Yang Kun, a
Shanghai-based bond analyst at Guotai Junan Securities Co. “It
shows regulators’ attitude toward defaults has changed and
they’re silently permitting defaults. Risk appetite will slump
There haven’t been any defaults in China’s publicly traded
domestic debt market since the central bank started regulating
it in 1997, according to Moody’s Investors Service. Guosen
Securities Co. estimates Chinese non-financial companies’ debt
ratios reached 93 percent last year, while the average in Asia
hasn’t surpassed 70 percent in the last 10 years, according to a
report released on Dec. 2.
“They’re going to miss the coupon payment,” said Ivan Chung, a Moody’s senior credit officer in Hong Kong. “If the
underwriters or the authorities don’t come out with a bailout
plan, it’s as good as the first default in China’s public bond
Some Chaori Solar bondholders plan to complain to the
Shanghai Fengxian local government later today and “express
their anger” at its not aiding the company, the 21st Century
Business Herald reported on its website.
Chaori Solar “will try to figure out when money will
arrive as soon as possible” and “try to keep the losses of
bondholders to a minimum,” according to yesterday’s stock
exchange filing. Directors’ salaries will be cut or delayed and
capital expenditure projects will be suspended, it said.
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 Bloomberg data. Bondholders have the right
to sell the bonds back to the company at par in March 2015. The
notes were priced at 76.2 percent of face value yesterday,
according to ChinaBond valuations.
A default may be China’s “Bear Stearns moment,” prompting
investors to reassess credit risks as they did after the U.S.
lender was bailed out in 2008, according to Bank of America
“We doubt the financial system in China will experience a
liquidity crunch immediately because of this default but we
think the chain reaction will probably start,” Bank of America
strategists David Cui, Tracy Tian and Katherine Tai wrote in a
note, adding that during the global financial crisis it took a
year to “to reach the Lehman stage” when investors began to
panic and shadow banking froze.
The bank’s head of greater China economics in Hong Kong, Lu Ting, said in a separate report a default would help ensure
better market pricing and a healthier bond market. China’s
corporate bond market totaled 8.7 trillion yuan at the end of
January compared with 800 billion yuan at the end of 2007,
according to Bank of America estimates.
That Chaori Solar would default on its debt was “to some
extent expected given the financial stresses the company had
been under for several years,” according to Nomura Holdings
Inc. Hong Kong-based economist Zhang Zhiwei. “The immediate
repercussions in the bond market may not be systemic.”
Fitch Ratings Ltd. said a default would be “positive for
the market in the long term as it will instill greater
discipline to price credit risk more effectively.”
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 top-rated notes
widened to 148 basis points on Feb. 12, the most since April
2012, before narrowing to 141 yesterday.
Guotai Junan’s Yang said yields on speculative-grade notes
may rise 200 basis points once investors realize there may be
more defaults in the pipeline.
LDK Solar Co. (LDK) has already defaulted on its overseas debt,
while Suntech Power Holdings Co. filed for bankruptcy protection
in U.S. courts. Bond maturities will start to slow next year,
with an average of $2.3 billion falling due in the coming five
Shanghai-based Chaori Solar’s announcement came on the eve
of the annual session of China’s National People’s Congress, the
country’s legislature. Li told the NPC today the government will
“declare war” on pollution and address debt risks.
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.
Solar-cell prices have begun to recover after falling 70
percent since 2010 as an industrywide expansion of capacity
exceeded demand. The average spot price of polysilicon, which is
used in solar cells, climbed 25 percent in the past year to
$20.69 per kilogram on Feb. 24, according to Bloomberg New
Just three to five “leading” solar companies will remain
in China by 2017 and account for 80 percent of the market, Trina
Solar Ltd. Chairman Jifan Gao said in a January interview. Trina
Solar, which returned to profitability in the third quarter,
bought a majority stake in solar-cell producer Hongyuan PV
Science and Technology earlier this year.
It’s become harder for unprofitable companies to obtain
bank loans for interest payments because of stricter risk
management policies at lenders, according to Xu Hanfei, a
Shanghai-based analyst at Guotai Junan. Chaori’s debt-to-asset
ratio was 90.1 percent at the end of the third quarter,
according to a company financial report released Oct. 27.
“In the short term investors will be risk averse, after
all, it’s an actual default,” said Zhang Yingjie, a Beijing-based deputy general manager in the research department of
Moody’s China joint venture, China Chengxin International Credit
Rating Co. “But in the long term, investors will see that
returns also reflect risks, which will benefit the development
of the market.”
To contact Bloomberg News staff for this story:
David Yong in Singapore at
Judy Chen in Shanghai at
To contact the editor responsible for this story:
John Liu at