Defaults in China’s Private Sector Mount as Tunghsu Joins List

(Bloomberg) -- Chinese technology conglomerate Tunghsu Group Co. is looking to extend its bond payment deadlines after failing to settle its obligations this week, in the latest sign that the nation’s private-sector firms are struggling to ease their debt load amid an economic slowdown.

What’s the company:

Beijing-based Tunghsu Group mainly produces photoelectric display components, but also operates new energy, real estate and other businesses. Its three listed companies -- Tunghsu Optoelectronic Technology Co., Tunghsu Azure Renewable Energy Co. and Shanghai Challenge Textile Co. -- have a combined market capitalization of 35.7 billion yuan ($5.1 billion).

Tunghsu Group had 50.9 billion yuan cash and cash-equivalent assets as of the end of June, and a total liability of 129.1 billion yuan, according to its interim financial results. Tunghsu Optoelectronic Technology had 18.3 billion yuan of cash holdings as of the end of September. Tunghsu Group has total offshore and onshore debt of 31.8 billion yuan, while Tunghsu Optoelectronic Tech has 5.7 billion yuan of onshore notes, Bloomberg-compiled data show.

What’s happening:

Tunghsu Group is in talks with bond investors about extending the repayment deadline on a 7.48% local note, after its Shenzhen-listed unit Tunghsu Optoelectronic Technology failed to repay the 1.97 billion yuan principal and interest. Holders of that note had exercised a put option to get an early repayment.

The company is also seeking to extend the coupon repayment deadline on a separate 5.09% local bond. Following that, the Shenzhen Stock Exchange asked Tunghsu Optoelectronicto explain why these payments were missed as the firm’s statements show it had a substantial amount of cash as of the end of September.

Tunghsu Group’s parent company Dongxu Optoelectronic Investment Co. is planning to sell its 51.46% stake in the firm to State-owned Assets Supervision and Administration of Shijiazhuang Municipal Government. Trading in the shares of two of the group’s listed units were halted on Tuesday.

The company’s struggles to repay its onshore debt saw Tunghsu Group’s dollar bond drop to about 44 cents on the dollar on Tuesday, according to credit traders. The bond price was around 67 cents at the end of last week.

Why does it matter:

Tunghsu Group’s financial woes are indicative of China’s sluggish manufacturing sector, which saw spending only barely above the record low level hit in September.

It also highlights the payment struggles faced by the nation’s private firms, which are being hit harder by the economic slowdown. Their access to the banking sector remains limited as lenders focus more on politically influential state-owned companies.

Predominantly led by private-sector firms, onshore defaults in China excluding Tunghsu are at 110 billion yuan, close to last year’s full-year record of 122 billion yuan, according to Bloomberg-compiled data.

Tunghsu Group’s missed local bond payments threaten to trigger a cross default in its U.S. dollar bond, an increasingly familiar scenario as China’s onshore defaults spill over to the offshore market.

Its dollar bond offering memorandum states that a cross default will be triggered on the note if the firm’s parent guarantor or any restricted subsidiary fails to repay principal amount of $10 million or more when due.

What does the company say:

A Tunghsu Group official and an underwriter of the defaulted yuan bond said that the company is asking bondholders to defer the early repayment deadline on the 7.48% note by six months. The company official also said the firm was looking to extend the coupon repayment deadline on the 5.09% bond by a period longer than six months.

Bondholders have yet to reach an agreement on the deadline extensions, according to the company official and bond underwriter.

What do ratings companies say:

S&P Global Ratings downgraded Tunghsu Group to CCC- from B- on Tuesday, highlighting the increasing liquidity stress the firm faces following the missed payments. A default or distressed exchange is highly likely within the next six months if the group’s circumstances do not improve significantly, S&P said.

Tunghsu Group’s parent’s plan to transfer its stake in the company is “highly uncertain” and could constitute a change of control under the group’s guaranteed U.S. dollar notes, S&P said.

Tunghsu Optoelectronic Technology faces a debt maturity wall from 2020 to 2021, and most of its repayment pressure comes from short-term debt, according to a rating report in June by United Credit Ratings Co., which rates the firm at AA+. It points to uncertainty over when the company will begin mass production after a costly expansion into building new product assemblies.

Fitch withdrew its B- rating in May after the company chose to stop participating in the rating process.

What are traders watching next:

Investors are waiting to see if Tunghsu Group can negotiate a debt payment delay from its creditors. Its parent Dongxu Optoelectronic’s ability to complete the stake sale is also a key area of focus, in addition to other fund-raising methods that may be used to shore up cash.

A potential cross default on Tunghsu Group’s dollar bond would also be on the radar of offshore bond investors.

Imminent bond maturities include Dongxu Optoelectronic’s 1.7 billion yuan medium-term notes due December 2021, which are puttable on Dec. 2, as well as Tunghsu Group’s 700 million yuan private bond due Dec. 26, according to S&P.

Read more:

Tunghsu Opto Told to Explain Reason for Missing Bond Payment

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