Chinese Fertilizer Firm Is Test Case for Local Bond Recasts

(Bloomberg) -- A Chinese fertilizer maker is being watched closely after it became a rare state-owned company to initiate a court-led debt restructuring, that could result in losses for some of its onshore creditors.

What’s the company:

Qinghai Salt Lake Industry Co. is a state-owned firm located in sparsely-populated province in northwest China that mainly produces potash. A local court in the province threw a lifeline to Qinghai Salt Lake in September by accepting a creditor’s request to restructure the firm amid its financial troubles.

Court-led bankruptcy proceedings are rare in China and regulators have been calling for more orderly debt workouts. They released draft guidelines last month to improve the the mechanism of dealing with bond defaults and resolving credit risk more effectively.

The company has defaulted on three outstanding bonds amounting to about 6.2 billion yuan ($894 million). It owes a total of 45 billion yuan to its creditors, according to an initial confirmation by the bankruptcy administrators, the company said in a filing on Dec. 26.

Qinghai Salt Lake had made “too aggressive” investments in the magnesium business, which has become a big source of loss, Wu Rui, executive director for mezzanine and credit investment at CDH Investments said earlier this week.

Qinghai Salt Lake had assets of 73 billion yuan and total liabilities of 55 billion yuan as of end-June, according to its semi-annual report. It had a net loss of 424 million yuan in that period, following a 3.5 billion yuan loss in 2018.

What’s happening:

Three months into a formal bankruptcy reorganization procedure, Qinghai Salt Lake proposed a debt restructuring plan that offers non-bank ordinary creditors the option of getting repaid in installments or receiving equity as payment, according to people familiar with the matter.

Each creditor that’s owed 500,000 yuan or below can get full repayment in cash, said the people. For amounts above 500,000 yuan, creditors can opt to swap the debt for the company’s equity at a price of 13.1 yuan per share, or choose to be paid in installments, they said. Calls to the company’s office responsible for disclosing securities information went unanswered.

Why does it matter:

Chinese bond investors are closely watching the outcome of Qinghai Salt Lake’s debt restructuring for clues on the magnitude of losses creditors may have to incur. Few state-run firms in the nation have undergone such a process and even though local bond defaults hit a record high in China last year, the nation’s private firms make up a bulk of that volume.

Overall, about a third of Chinese bond issuers that went into bankruptcy reorganizations are state-owned enterprises, and only two of them have announced court-approved restructuring plans, according to Bloomberg calculations.

Out of the 414 onshore bonds that had defaulted as of end 2019, only 74 completed “proper debt restructurings”, according to Tan Chang, an analyst at China Chengxin International Rating Co.

Investor caution toward state-run firms has risen after Tewoo Group Co. recently became the biggest dollar bond defaulter in two decades.

What do ratings agencies say:

Dagong Global Credit Rating Co. downgraded Qinghai Salt Lake to BB from AA- on Dec. 4 after the company and some of its subsidiaries started a court-led restructuring process that led some of its bondholders seeking immediate repayment.

Sale of its key chemical unit can have a “positive effect” on debt repayment, Dagong said in the report.

What are traders watching next:

All eyes are now on the creditors’ meeting on Jan. 17 where they’re expected to vote on the restructuring proposal. Progress on its asset sales will also be closely watched after five auctions for some of the key assets at its units failed. A new auction is expected to be held on Jan. 9 via Taobao’s online platform.

What Else?

Shenzhen-listed Qinghai Salt Lake has been a candidate for delisting since April 2019 after reporting net losses for two consecutive years. The stock, which can only move 5% daily in either direction, dropped 4.1% on Jan. 3 following its plan to issue new shares.

--With assistance from Sofia Horta e Costa.

To contact Bloomberg News staff for this story: Tongjian Dong in Shanghai at tdong28@bloomberg.net;Ina Zhou in Hong Kong at hzhou179@bloomberg.net;Jing Zhao in Beijing at jzhao231@bloomberg.net

To contact the editors responsible for this story: Neha D'silva at ndsilva1@bloomberg.net, Chan Tien Hin

©2020 Bloomberg L.P.

With assistance from Bloomberg