Jilin Trust default raises specter of more in coal industry
The fallout from the Jilin Trust default is spreading, and experts have warned of more default risks occurring in industries such as coal mining. Songhuajianghao, a trust product designed by the northeast Chinabased Jilin Trust and backed by a coal company called Shanxi Liansheng Energy, failed to meet redemption on Wednesday, missed payments for the fifth time and pushed its default volume to 872.7 million yuan ($143.5 million).
The product was issued to clients of China Construction Bank, China’s second-largest lender, and raised 972.7 million yuan in six issuances starting in 2011.
Jilin Trust said the default was caused by Liansheng Energy’s failure to repay the loan.
“Jilin Trust is making full efforts to sort out the issue. Company executives have been visiting Shanxi many times. Commissioners are discussing with Liansheng Energy, CCB and other parties in Shanxi about repayment plans, to ensure investors’ interests. Restructuring of Liansheng is underway,” the company said in an e-mail to China Daily on Thursday.
According to a news conference held by a local court in Liulin County, north China’s Shanxi Province, where Liansheng Energy is based, the group is suffering from an outstanding debt of 30 billion yuan and is struggling to meet its liabilities.
The 21st Century Business Herald said on Monday that China Development Bank, also the biggest creditor of Liansheng Energy, is leading a restructuring of the company.
The plan would give Liansheng six years to restructure, and priority would be placed on paying off the trust products as they mature.
Liansheng Energy was not available to confirm the report on Thursday.
Earlier reports said that six trust companies, including Jilin Trust, had together lent 5 billion yuan to Liansheng.
“More and more trust products will come due in the coming quarters,” said Wang Tao, chief China economist with UBS. “With the very rapid growth and an average maturity of two years, more trusts are set to come due each quarter, and some may need to be rolled over or allocated fresh funding. As such, the risk of further trust repayment issues or default is set to rise.”
“Basic industries, including mining and materials, are the major destinations for trust investment, while based on the gloomy industry outlook, the products have high possibilities of default,” said Wayne Lu, a product manager with a mid-sized trust company in Shanghai.
Slowing economic growth and anti-pollution policies have dragged coal prices to nearly a four-year low. Among the 15 listed companies that released annual reports Monday, 13 reported big declines in profit during 2013.
Repayment difficulties have emerged among coal firms other than Shanxi Liansheng Energy. Another miner, Shanxi Zhenfu Energy, was unable to meet its liabilities in January, causing agent China Credit Trust problems in redemption of its 3 billion yuan in highyield trust products.
China’s trust sector has been one of the fastest-growing types of non-bank, or “shadow banking”, credit. As of the third quarter last year, overall trust assets reached about 10 trillion yuan, up from 2 trillion at the end of 2009 and accounting for about 9 percent of overall credit in the system, according to UBS.
Analysts have argued that China should tolerate trust product defaults in order to teach investors a lesson about the risk of high-yield investments.
But some said defaults would lead to a loss of confidence in China’s trust and other shadow credit markets, as well as a shrinkage of liquidity in those markets and a systemic credit crunch.
Local governments and financial institutions also have low tolerance for defaults out of a need to protect their reputations.
Since 2012, more than 20 trust products totaling 23.8 billion yuan have run into payment issues. About half of these cases are still in court, though in most cases, investors have been paid either by trust companies or their linked guarantors, Wang said.