Another Chinese company, has failed to pay interest on high-yield bonds. Xuzhou Zhongsen Tonghao New Board Co., a Chinese building material company, missed a 10% coupon payment due March 28 on $29 million worth on notes it sold last year in a private placement. This makes it the first “default in China’s private placement market for high-yield bonds from small- and medium-sized enterprises that started in 2012,” and the second default for China’s note market, following one by Shanghai Chaori Solar Energy Science & Technology Co. (002506) not more than two weeks ago.
If there are more defaults in the near future, it suggests that the Chinese government is moving away from its practice of bailing out failing companies. James Zhoa, chief investment officer in Beijing at the international department of CCB Principal Asset Management Co. said that“There will continue to be a mixture of bond defaults and too-big-to-fail, or too-entangled, cases. It’s now up to the market to find the pattern and investors will now have to figure out who is creditworthy and who is more likely to fail.” According to the article, since the global financial crisis, publicly traded non-financial corporates with debt-to-equity ratios above 200% has jumped 57%. It seems that more defaults will come as China shifts to adopt more market oriented policies.
If more large companies continue this pattern of not being able to pay back these large sums of money, the Chinese government should step in to bail them out because the companies are also screwing over the lenders.
An important measure to help prevent bond defaults could be more stringent requirements for receiving loans on the part of lenders. This would better ensure that only qualified borrowers would receive loans.