Regulatory Pressure Mounts on Coal Miner that Rattled China's Bond Market

11/25/2020 | 06:40am

By Chong Koh Ping

An investigation into a troubled Chinese state-owned coal miner was escalated to the country's securities regulator, as authorities pile pressure on the company whose recent default rattled the bond market.

The National Association of Financial Market Institutional Investors, a self-regulating body supervised by China's central bank, said late Tuesday that it had sent leads related to suspected violations of laws and regulations by Yongcheng Coal & Electricity Holding Group Co. to the China Securities Regulatory Commission. The industry group said it would also impose unspecified sanctions on the company and start an investigation into its parent, an energy and chemicals conglomerate.

Yongcheng Coal missed a deadline earlier this month to repay 1 billion yuan, equivalent to $152 million, in 270-day commercial paper that matured Nov. 10, after having sold new debt just weeks earlier. The company had also transferred some assets, including stakes in a local bank and several chemical firms, to other local state companies.

The miner's failure to make the debt payment and recent bond defaults by an automotive business and a chip maker have caused unease among investors, sending yields on riskier corporate bonds higher. Yields rise as bond prices fall.

Yields on three-year Chinese corporate bonds with double-A credit ratings--a grade that in China's domestic rating system indicates a significant amount of risk--rose to more than 4.482% on Tuesday, their highest since December 2018, according to Wind. They edged down slightly to 4.479% Wednesday but are still significantly higher than a few weeks ago.

In comparison, yields on triple-A-rated three-year corporate bonds fell slightly to 3.881%. Three-year Chinese government bonds were yielding 3.085% Wednesday, according to Wind.

Chinese authorities have taken a tough stance on the recent defaults, in what analysts say are attempts to quell investor worries about wider liquidity problems among state-owned enterprises. China's top financial body, chaired by Vice Premier Liu He, President Xi Jinping's point person on economic and financial issues, warned over the weekend that it would show zero tolerance for misconduct in the debt markets.

On Tuesday, Yongcheng Coal and the main underwriters of its commercial paper said in regulatory filings that all 31 holders of the debt have agreed on a repayment plan. The company, whose parent is owned by the Henan provincial government, said it would repay half of the 1 billion yuan to creditors and roll over the rest for another 270 days.

The 4.39% interest rate on the debt will remain unchanged during the extension period, and repayment of the rest of the principal and interest will be done in a lump sum.

The company still has liquidity problems. Yongcheng Coal separately said earlier this week that it wasn't able to repay two other short-term debt issues totaling 2 billion yuan that recently matured. The company said the coronavirus pandemic has taken a negative toll on its business operations and that it has had difficulties raising funds in the bond market.

Chang Li, a Beijing-based director at S&P Global Ratings, said he expects regulators to take further steps to address investor concerns on information disclosure and poor governance at companies, including state-owned enterprises, as market confidence has been shaken by the recent string of credit events.

"The Chinese authorities have shown increased tolerance of SOE defaults in recent years and have been encouraging market-based debt restructuring while cracking down on financial misconduct to mitigate potential systemic risk," he said.

Mr. Li added that he doesn't expect the recent string of SOE debt problems to lead to widespread issues in China, as debt defaults still make up less than 1% of outstanding corporate bonds.

Xing Zhaopeng, a China markets economist at ANZ in Shanghai, said the recent weekend meeting of financial regulators and recent regulatory moves show how authorities are trying to stabilize the markets.

"This wave of shock brought by the surprising defaults by state companies like Yongcheng has ebbed," Mr. Xing said, adding that is a promising sign that creditors were able to recoup half the value of the debt that went unpaid earlier.

"But overall, these incidents are like wake-up calls" for investors to be cognizant about default risks," he said.

Xie Yu contributed to this article.

Write to Chong Koh Ping at chong.kohping@wsj.com

(END) Dow Jones Newswires

11-25-20 0639ET

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