By Bloomberg News
Another week, another Chinese debt guessing game.
This time it’s the steel industry’s turn, as investors wonder if a potential bond default by Sinosteel Co. is an omen of things to come amid slowing demand for the metal used in everything from cars to construction.
The state-owned steel trader, whose parent warned of financial stress last year, may have to honor 2 billion yuan ($315 million) of principal next Tuesday when bondholders can exercise an option forcing the notes’ redemption two years before they mature. If that should happen, China Merchants Securities Co. thinks the firm will struggle to repay.
A default would be the first by a Chinese steel company in the local bond market, which has had five missed payments this year, according to China International Capital Corp. Premier Li Keqiang is allowing more defaults to weed out the weakest firms as he seeks to rebalance a slowing economy. Steel issuers’ revenue fell about 20 percent in the first half from a year earlier and over half of the firms suffered losses, according to China Investment Securities Co.
“Sinosteel’s default risks are very high,” said Sun Binbin, a bond analyst at China Merchants Securities in Shanghai. “If there is no external help, its own financials won’t allow them to repay the bonds if investors exercise the option to sell.”
Four telephone calls and an e-mail to Sinosteel weren’t answered on Tuesday and Wednesday.
China’s demand for steel will probably shrink 3.5 percent this year and another 2 percent in 2016 after consumption peaked in 2013, the World Steel Association said this week. That followed an Oct. 8 report from Xinhua saying that Haixin Iron & Steel Group, the largest private steel firm in north China, plans to restructure after filing for bankruptcy.
“Given the serious overcapacity problem and fluctuations in commodity prices, more steel companies may have losses,” said Zhang Chao, a bond analyst at China Investment Securities in Shenzhen. “More steel companies, including state-owned companies, may default.”
Holders of Sinosteel’s 2017 bonds can exercise a put option to sell them back to the firm on Oct. 20, according to data compiled by Bloomberg. The yield on the notes, which were sold in 2010, has dropped 31 basis points this month to 5.46 percent, according to valuations compiled by ChinaBond.
Parent company Sinosteel Corp., which offered a guarantee for the bonds, saidin September 2014 it was facing financial difficulties as the economy slowed and some customers weren’t paying on time. China Chengxin International Credit Rating Co. cut the company’s rating to BB from AA- in July, citing “great” operating difficulties amid slumping commodity prices.
Sinosteel Corp. and its units had more than 100 billion yuan of debt as of December last year, Caixin reported in May, citing data collected by a debt commission led by Bank of China. The company is yet to release its 2014 financial report.
“If Sinosteel defaults, it will be more difficult for steel companies to raise money,” said Qiu Xinhong, a money manager in Shenzhen at First State Cinda Fund Management Co., which oversees 6.9 billion yuan of assets. “That would be a heavy to blow to the whole steel industry.”