Cement firm default shows China more willing to let firms fail (updated)

Asia Cement

11/11/2015 10:22

* Firms says default certain for repayments on $500 mln 2020 
bonds 
    * Sign that authorities willing to let weaker firms fail 
    * Shanshui dollar bonds drop sharply on news 
    * First public default by a company was only in 2014 
 
 (Recasts, adds details about fight for management control) 
    By Umesh Desai 
    HONG KONG, Nov 11 (Reuters) - China Shanshui Cement 
 0691.HK  warned investors it will default on more than $300 
million of onshore debt payments due on Thursday and will seek 
to appoint liquidators, a sign Chinese authorities are more 
willing to let weak firms fail. 
    The privately controlled company, with a market 
capitalisation of $2.7 billion, has felt the squeeze from 
falling demand in a sector struggling with overcapacity as the 
giant economy shifts gears. 
    It reported a 31 percent decline in revenues and a net loss 
for the first half of the year. At that time, long-term 
borrowings were over 8 billion yuan ($1.25 billion). 
    Chinese authorities are keen for markets to price credit 
risk more accurately, in part to provide a check on industrial 
overcapacity, and so are likely to increasingly distinguish 
between stronger firms and weaker ones, analysts said. 
    "It's a sign that bailouts are not for everybody and that 
the slowing economy is taking its toll on the non-investment 
grade sector," said Warut Promboon, chief rating officer at 
Dagong Global Credit Rating. 
    "The strong names will get the benefit of cheap funding 
because the central bank will keep monetary conditions easy 
while the riskier credits will have a hard time refinancing 
because of weakening metrics," Promboon said. 
    Chinese markets have operated for years under the assumption 
that most bonds are state guaranteed, highlighting the 
difficulty of pricing risk in the country. 
    The first public default, by Chaori Solar, was only in 2014 
and since then there has been a trickle of missed debt payments 
as companies were left to defend for themselves. 
    It was only in April this year that Baoding Tianwei Baobian 
Electric Co Ltd  600550.SS  became the first state-owned firm 
allowed to default.  urn:newsml:reuters.com:*:nL4N0XI3BA 
     
    DOLLAR DEBT PLUNGES 
    Shanshui's board said in a stock exchange filing it had 
concluded that it would be unable to repay holders of a bond 
maturing on Thursday, so had decided to petition to wind-up the 
company. 
    The 2 billion yuan bond  CN011599179=  was issued by its 
fully-owned subsidiary Shandong Shanshui. 
    The default would trigger an accelerated repayment clause on 
its $500 million in dollar bonds due 2020  XS120043960=TE , and 
so constitute a default event on those bonds as well, it said. 
    Those bonds, trading around 80 cents on the dollar on 
Tuesday, plunged to 45 cents on Wednesday after the 
announcement, before recovering to trade around 65 cents. 
    The company also has $28 million in outstanding bonds due in 
2016, Reuters calculations show. 
    The company's shares have been suspended since April. 
    "The call of the hour is for the cement sector to have 
meaningful consolidation. It suffers from overcapacity and 
environmental issues, increasing the pressure on players to weed 
out competition in order to gain economies of scale and sustain 
market share," said Nancy Koh, a DBS credit analyst in 
Singapore. 
    Shanshui's situation has been complicated by a fight for 
management control, which analysts said had unnerved lenders. 
    Privately owned Tianrui Group, which owns a 28.61 percent 
stake in Shanshui, failed earlier this year in attempts to 
remove most directors of the company. Tianrui's latest proposal 
to remove directors is due to be heard at an extraordinary 
general meeting on Nov 25. 
    Two other major shareholders, China National Building 
Material  3323.HK  holding 16.67 percent of the company and Asia 
Cement Corporation  1102.TW  which owns 20.96 percent, have an 
outstanding buy-out offer. The terms have not been made public. 
    "Management tussles accelerated its operational and 
financial deterioration, on top of being in an industry plagued 
by overcapacity," said Mervyn Teo, analyst with Lucror 
Analytics, an independent credit research firm. 
    Standard & Poor's warned in June of a heightened repayment 
risk by Shanshui and cut its bond rating to CCC from B-plus. 
    After Wednesday's announcement, Fitch Ratings lowered its 
assessment of Shanshui to restricted default rating (RD), 
indicating a high chance of default, from C. 
    Other buyers could emerge for Shanshui, Lucror Analytics 
said in a note. 
    "We last saw this with the bailout of Shanghai Chaori Solar 
by a China bad loan bank, Great Wall Asset Management in 2014," 
the note said. "We believe the most probable outcome could be 
that the company is taken over by a strong party and bondholders 
are repaid in full." 
 
 (Additional reporting by Nathaniel Taplin in SHANGHAI; Editing 
by Edwina Gibbs and Neil Fullick) 
 ((umesh.desai@thomsonreuters.com; +852-2843-6935; Reuters 
Messaging: umesh.desai.thomsonreuters.com@reuters.net)) 
 
Keywords: SHANSHUI CEMENT DEFAULT/