(Bloomberg) -- The latest bond default by a Chinese industrial group at the epicenter of a regional debt storm is escalating concerns about a cluster of private firms entangled in risky financing. Shandong-based Xiwang Group Co., which failed to make good on a delayed repayment on a local bond, is scrambling to refinance and avoid deeper trouble after triggering cross-default clauses on other bonds.
What’s the company:
A corn oil and steel processor founded in 1986, Xiwang Group traces its roots to a small business from an impoverished village. It has since grown into a prominent local private conglomerate that also has a presence in logistics, property and trade. Based in Zouping county in the eastern Shandong province, the group controls three listed companies: Xiwang Foodstuffs Co., Xiwang Special Steel Co. and Xiwang Property Holdings Co.
The group has total assets of about 49.8 billion yuan ($7.1 billion) and total liabilities of about 30.7 billion yuan, including interest-bearing loans of 21.3 billion yuan as of the end of June, according to the company’s semi-annual report. The group has 9.9 billion yuan in outstanding bonds, including those it has recently defaulted on, according to Bloomberg-compiled data. The company doesn’t have offshore debt. It employs over 16,000 people, according to its website.
Xiwang Group failed to pay a 1 billion yuan bond Wednesday, missing a fresh repayment deadline on an already defaulted bond. Bondholders had agreed to give company an extra month to pay the principal and interest on the note originally due Oct. 24. The company also scrapped a 450 million yuan bond sale in October.
The latest bond failure triggered cross-default clauses on other bonds, including a 800 million yuan bond due Thursday. Bondholders rejected a plan to prevent early maturities coming into effect on some of the group’s notes.
In yet another sign of stress, Xiwang Group’s chairman Wang Yong, who also wears the hat of Xiwang village’s Community Party secretary, pledged 617.3m of his shares in the company to a local government investment company from Zouping county.
The group’s delinquency sparked contagion fears among other privately-owned firms in Shandong, a province where companies are well-known for vouching for each other’s borrowings.
Investors have dumped dollar bonds from neighboring firms including aluminum producer China Hongqiao Group Ltd. and food distributor Shandong Sanxing Group Co., sending prices to record lows at the end of October. In a move to reassure its own creditors, China Hongqiao said at that time it doesn’t plan to help Xiwang Group and has no business relations with the company.
Xiwang Group’s crisis also triggered a sell-off in dollar debt issued by other companies from the same province, such as Shandong Yuhuang Chemical Co., Shandong Sanxing Group Co. and Shandong Ruyi Technology Group Co.
The company has 3.3 billion yuan worth of bonds, including defaulted notes, coming due from now until the end of next year, followed by 4 billion yuan in 2021. Xiwang Group said it is working on a settlement plan for bonds outstanding.
Calls to the company went unanswered.
Why does it matter:
The debt woes plaguing Xiwang Group and its neighboring peers are symptomatic of the financial malaise caused by aggressive business expansion and reckless financing by many Chinese private firms in recent years. The popularity and complex web of often hidden cross-guarantees between companies in Shandong has made the region particularly vulnerable to Beijing’s campaign to cut a bulging debt pile in recent years.
Xiwang’s bond defaults are adding to a near-record rate of delinquencies in the domestic bond market. China’s onshore defaults amount to 113.9 billion yuan so far this year, including 53 private and 82 public offerings.
Shandong is a big contributor. The province recorded the highest onshore default amount in the first half of this year, according to an October report from S&P Global Ratings.
What do ratings companies say:
Golden Credit Rating International Co. cut Xiwang Group’s rating to C from BB, according to a report dated Thursday from the Chinese credit risk assessor. This follows a downgrade to BB from A+ by the ratings firm earlier last month. S&P withdrew its BB- rating of Xiwang Special Steel, the group’s Hong Kong-listed unit, in 2015.
What are traders watching next:
Investors are waiting to see whether Xiwang Group will be able to come up with a debt restructuring plan in the near term. This may include options ranging from debt rollovers, redemption with deep discounts to debt-to-equity swaps, according to Shen Chen, a partner at Shanghai Maoliang Investment Management LLP.
The company’s equally troubled peers from the same province will also remain on traders’ radar screen for fresh signs of distress.
Two China Firms’ Dollar Bonds Sink in Shandong as Woes Grow
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China Steelmaker Defaults on Already Delayed Bond Payment
China’s Ruyi Faces Debt Hangover on $4 Billion Buying Binge
--With assistance from Tongjian Dong.
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