Getting it right on Chinese bond bailout winners can lead to a windfall 30 per cent return
- Buyers of distressed debt of Chinese local oil refiner Shandong Qicheng Petroleum Chemical Industry Co earned a handsome return in weeks
- Bailouts can be expected as authorities seek to avert a further daisy chain of defaults
Venturing beyond bonds from state-owned issuers in China often involves more than just assessing credit risk. Investors need to make a call on whether authorities will bail out the borrower.
Make a good call on that, and the rewards can be great. Any trader that took the plunge a month ago on buying the debt of distressed Chinese local oil refiner Shandong Qicheng Petroleum Chemical Industry Co got paid handsomely for the effort. They would have earned almost 30 per cent in three weeks.
It would have been a brave move: the company warned in a public statement on June 4 that it had “lost refinancing abilities”. But less than three weeks later, another statement said it had repaid all overdue loans, and cited help from local officials and regulators in its financial obligations.
Chinese authorities have been trying to wind back implicit debt guarantees in the world’s second-biggest bond market, to introduce pricing based on credit risk – and improve the returns on capital over time. The trouble is that any sudden, universal withdrawal could trigger a systemic collapse. That means some borrowers get rescued, though even experts struggle with predicting officials’ decisions.
“It is good comfort to bondholders that the government intervenes and reinforces the implicit government support,” said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group in Singapore. “But it will surely lead to some moral hazard,” he said, referring to borrowers taking on extra risk in anticipation of official aid.
The government won’t let the cross-guarantee crisis deepen because it has a serious cascading effect
A counterpoint to the oil refiner – at least until now – is Tewoo Group Co, a state-held commodities trader whose government ownership would otherwise have argued for official support. Fitch Ratings decided in April that the public guarantee was less ironclad than it thought, slashing Tewoo’s credit score by six steps in one go. One offshore Tewoo bond hit a record low below 40 cents on the dollar Wednesday.
