China Bonds Sell at Record 97% Discount in Anonymous Auction

(Bloomberg) -- Chinese defaulted bonds just sold at a discount of as much as 97% in an anonymous auction.

Six defaulted notes changed hands, with the cheapest selling for as little as 3 yuan in an auction organized by the China Foreign Exchange Trade System on Wednesday. That’s a record low for a sale of this type. One didn’t sell, according to an exchange statement on its official WeChat account.

The sale is a sign of investors’ increasing tolerance of risk in China’s nascent distressed debt market amid a broader boom in onshore high yield trading. Policymakers have been encouraging a market-oriented approach in the country’s credit markets since 2014 when authorities first started allowing companies to default. The total number of defaults in 2019 is on track to eclipse last year’s record.

While there may be bargains, betting on bankruptcy outcomes remains a dicey business in China. With relatively few precedents of successful restructuring efforts, the majority of situations have yet to be resolved, according to a Goldman Sachs report.

Investors’ uncertainty over the distressed firms is also starting to show in the steep discounts the bonds are sold at. Qinghai Salt Lake Industry Co.’s 5.3% perpetual bond sold at a 70% discount at the auction. The state-owned fertilizer maker was recently thrown a lifeline when a local court accepted a creditor’s request to restructure the company. Shares rallied more than 70% after the petition was filed in August through the end of last week, but they’ve fallen by the 5% daily limit so far every day this week.

--With assistance from Tongjian Dong, Ling Zeng and Zheng Wu.

To contact the reporters on this story: Rebecca Choong Wilkins in Hong Kong at rchoongwilki@bloomberg.net;Xize Kang in Beijing at xkang7@bloomberg.net

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

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