Jilin Trust de­fault raises specter of more in coal in­dus­try

China Daily (Canada) - - BUSINESS - By XIE YU in Shang­hai xieyu@chi­nadaily.com.cn

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.

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