China’s Bond Defaults: Is It Time to Be Worried?

Tewoo’s debt restructuring breaks the market’s assumption that offshore creditors will get full repayment in debt workouts. Investors in China’s SOEs need to brace for more defaults.

The recent bond default of Chinese provincial state-owned company Tewoo Group Co marks the first time a Chinese government-backed entity has failed to meet its offshore obligations. However, it is unlikely to be the last.

The assumption that state-owned entities are too big to fail no longer holds true.

China’s SOEs can no longer rely on the government for sure-shot support – a shift that should trigger introspection at these firms and foster greater discipline. Runaway borrowing to shore up a flailing operation will no longer be an option.

Although the process will be painful, the push to improve business planning and better practices will ultimately benefit these companies, boosting their competitiveness.

Hefty haircuts

Creditors to Tewoo Group, which provides financing to companies in the steel sector, had to accept a deal that meant selling back the debt at discounts as high as 64% and 47%, in accordance with a restructuring proposal by the defaulter.

The company put together the scheme just shy December 16, the day its USD 300 million of 4.5% notes came due, Caixin Global reported on December 13. Issuances maturing in 2020 and 2022 were also affected, as were USD 450 million worth of perpetual bonds.

The hefty haircuts that investors have had to stomach have shocked … [read more] 

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