China's first potential onshore bond default to increase funding costs: S&P

HONG KONG - The imminent default by Chinese solar-equipment maker Shanghai Chaori Solar Energy Science and Technology Co. (Chaori) is poised to be a transformative event for China's corporate bond market, says ratings agency Standard & Poor's. “We believe the Chinese Government is beginning to address the difficult moral hazard and implicit State guarantee of financially weak and commercially unviable borrowers,” S&P says.

The agency adds: “The likely outcome of this event would be a greater differentiation of credit risks, leading to more limited funding at a higher cost for the weaker companies. Together with tough operating conditions in some industries, the tightening funding conditions could lead to more defaults among weak borrowers.”

Chaori announced on Wednesday that it would be unable to pay RMB 90 million (US$14.7 million) in interest due March 7 on RMB1 billion (US$164 million) in bonds. It would be the first default in China's public bond market, which began trading in the early 1990s but has grown to become the fourth largest globally.

S&P says Chaori could follow some Chinese trust products that defaulted early in 2014--signalling a greater Government willingness to let borrowers be subjected to market discipline. “The current Chinese leadership's broader strategy is to increase the role of the market in allocating financial capital resources,“ it adds.

“Corporate bond issuers in China have so far averted default in the onshore market because of support from banks (who are the largest buyers of corporate bonds) and Government policy aimed at avoiding potential disruptions to the credit markets. Chaori has been facing financial difficulties for several years and avoided default in early 2013 when the local government arranged for banks to help the company tide over the period.” www.standardandpoors.com (ATI).