One of China’s biggest defaulters has a US$10bil plan and it’s scaring investors

HONG KONG: A move by one of China’s biggest corporate delinquents to include bonds sold by a healthier subsidiary in a workout proposal has stoked concerns about creditors’ rights in a market still getting used to the concept of defaults.

Coal miner Wintime Energy Co by mid-2018 found itself incapable of servicing debt that quadrupled in less than five years. Now it’s proposing the inclusion of a US$500mil note sold by Huachen Energy Co in a 70 billion yuan (US$10bil) overall restructuring package.

Huachen hasn’t defaulted on those offshore notes, and bundling them together with the obligations of its more sickly parent could appeal to Wintime creditors.

The move is less appealing to investors who had considered subsidiaries as independent issuers – with their own balance sheets – when it came to creditworthiness.

Should the plan go ahead, a greater degree of due diligence may be needed as fund managers grapple with the implications of a record run of defaults in the world’s third-largest bond market.

“If substantive consolidation was applied in China in the Wintime case, without the consent of the offshore bondholders, it would certainly be very surprising,” said Kingsley Ong, a Hong Kong-based partner at Eversheds Sutherland.

“Any attempt to apply the concept in a cowboy fashion, against the interests of the offshore bondholders, will almost certainly hurt foreign investors’ confidence toward debt issued by Chinese entities.”

The official in charge of Wintime’s information disclosure wasn’t available to comment and calls to the deputy head of Huachen Energy’s financial management department went unanswered.

While Huachen itself has had challenges – missing a coupon payment on its 2020 dollar bonds in recent days – the company said in a statement late on Tuesday that it would make that payment by Dec 18, within the grace period.

In a developed market such as the US, there’s less focus on any parent company when considering the credit profile of a bond issuer, and any move by the parent that impinges on its unit could end up in court, market participants say.