Yesterday, 07:34 PM
Two weeks ago we previewed what we said would soon be a D-Day for China's bond market, as a massive commodities trader and Global 500 state-owned enterprise was set for an "unprecedented" bond default.
As of last week, this historic default is now in the history books after Tewoo, the closely watched Chinese commodities trader, became the biggest dollar bond defaulter among the nation’s state-owned companies in two decades, in what Bloomberg called a "moment of reckoning" for Beijing as China struggles to contain credit risk in a weakening economy, as bond defaults hit an all time high and are set to keep rising in the coming years.
Last Wednesday, Tewoo Group announced results of its "unprecedented" debt restructuring, which saw a majority of its investors accepting heavy losses, and which according to rating agencies qualifies as an event of default. As a result of the default, until recently seen as virtually impossible for a state-owned company, investors’ perceptions are undergoing a dramatic U-turn about government-owned borrowers whose state-ownership had for years offered an ironclad sense of security.
No more: The fact that a state-owned enterprise such as Tewoo has now defaulted on repaying its dollar bonds in full, confirms that Beijing will no longer bail out troubled SOEs, let alone private firms, perhaps due to the strains imposed by the economy which while growing at just below 6%, is slowing the most in three decades. It also raises concerns over the Chinese province of Tianjin, where Tewoo is based, following a series of rating downgrades and financing difficulties suffered by some of the city’s state-run firms. The metropolis near Beijing also has the highest ratio of local government financing vehicle bonds to GDP in China.
As a reminder, Tewoo ranked 132 in 2018’s Fortune Global 500 list, higher than many other conglomerates including service carrier China Telecommunications Corp. and financial titan Citic Group Corp. It had an annual revenue of $66.6 billion, profits of about $122 million, assets worth $38.3 billion, and more than 17,000 employees as of 2017, according to Fortune’s website. Tewoo is owned by the Tianjin government and operates in a number of industries including infrastructure, logistics, mining, autos and ports, according to its website. It also has footprints in countries including the U.S., Germany, Japan and Singapore.
Putting last week's "unprecedented" event in context, since the first SOE bond default emerged in China’s domestic market four years ago, 22 such firms have failed to make good on a combined 48.4 billion yuan ($6.9 billion) onshore bonds as of the end of October, according to Guosheng Securities. However, despite periodic scares such as late repayment, Chinese SOEs had yet to suffer any high-profile default in the dollar bond market since the collapse of Guangdong International Trust and Investment Corp. in 1998.
Tewoo is precisely that default.
Furthermore, Tewoo's exchange offer, which has bondholders accepting a major haircut on their bonds, is seen as a road-map for resolving similar debt crises in the future as the prospect of more failures by state-backed firms looms. 2019 has already seen over 20 billion in SOE bond defaults, nearly triple 2018's total and the highest on record.
Connect With Us