Vulture funds buy up bonds of China state-owned enterprises
Default of two industrial groups triggers plunge in prices of corporate debt
According to the Financial Times:
Vulture funds are racing to buy bonds of troubled Chinese state-owned enterprises, after a sharp sell-off sparked by a large coal mining group’s default on a Rmb1bn ($156m) debt issue.
Yongcheng Coal & Electricity, a coal miner in central Henan province, one of China’s most populous provinces with more than 95m people, defaulted on Friday. This was just weeks after Brilliance Auto, a carmaker owned by the Liaoning provincial government, announced it would not be able to repay a three-year Rmb1bn bond.
The default of the two groups has triggered a plunge in prices of state-backed corporate debt as international and onshore investors grappled with the prospect of China’s central government stepping back from its traditional role as a safety net for local government businesses.
Beijing faces a challenge in trying to manage the stress on SOEs, particularly companies controlled by provincial and municipal governments that are struggling financially during the Covid-19 pandemic.
“The central government won’t allow the situation to deteriorate as that could lead to systemic risks,” said David Huang, a Shanghai-based bond fund manager who spent Rmb20m to buy a three-year note by Brilliance Auto for 20 cents on the dollar. “That creates an investment opportunity.”
Other investors, however, viewed the defaults as a sign that government bailouts of distressed state companies, once taken for granted by most investors, could no longer be guaranteed. “Our investment decision had been based on the belief that triple-A rated state firms are safe investments regardless of their fundamentals,” said the chief ratings officer at a Shanghai-based bond fund. “That’s no longer the case.”
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