2014-08-01

Who Broke China Bond Market's No Default Streak? Mutual Credit Guarantees

First an article on why more private bond defaults are coming, which asks who broke the the no default streak, followed by another textbook case of mutual credit guarantees destroying a healthy company. Only this time the firm had issued private bonds, so the impact is wider.

Article: 是谁打破了中国债市零违约?

My rough and selected translation: China's no default streak is history. Chaori ignited a flame that has spread to the private bond market, short-term financing, and eventually the debt market's 刚性兑付 (where trust companies or financial institutions buy back a product headed for default and try to work out the debt or eat the loss, protecting investors from taking a loss) streak will break. There's no suspense, only waiting to see who is the lotto winner.

What has people puzzled is, why don't the credit guarantees work? Everybody knows debt issuers will find a credit guarantee company to give investors a tranquilizer, and guaranteed credit is smoothly issued. Normal credit guarantees are irrevocable, joint liability, meaning when a debt issuer can't repay at maturity, it at least can count on the credit guarantee third party to pay cash.

However, domestic credit guarantee firms are a mixture of good and bad, roughly divided into two groups: the first is the group guarantee or mutual guarantee; the second is the specialty credit organization. The problem today is that credit guarantee firms are helpless, unable to repay debt. The specialized credit firm, even though it earns a high profit, doesn't have a lot of capital and one bad result can lead to a cash crunch. The mutual guarantees only need a single capital chain to break and it gets scary.

Currently the greatest risk of default is in the private bond market, this is where the risk is greatest of a payment failure. There are about 30 bonds coming due worth ¥5 billion and the credit guarantee situation is not optimistic. For example, "13中森债" (13 Zhong Sen Zhai) credit guarantee is from Sino-Capital Guaranty (中海信达), a firm that has already broken promises several times. Another, credit guarantor for "12金泰债" (12 Jintai) has so much debt its guarantee is worthless.

Facing this difficulty, if you hope the government will rescue, you're wrong. Leaving aside that local governments are also in debt, everyone knows there will be defaults and the governments ability to help is shrinking by the day. So don't naively think you will be able to avoid loss of principal and interest. Of course, investors can take the legal route and sue the debt issuer, credit guarantee firm and underwriter. Bond investors must be prudent, make sure the guarantee has force and the ratings are fair.

是谁打破了中国债市零违约?

While translating this I looked up the "12金泰债" situation. This is an interesting case and answers the question above. Mutual credit guarantees broke the market.

起底12金泰债:祸起联保 未来或申请破产保护

The headline is roughly, "Disaster Guarantee Could Result In Seeking Bankruptcy Protection." Right off the bat, the intro to the article says that the company in question could be headed for bankruptcy not due to any operational trouble, but because of the firms many mutual guarantees. This bond, "12金泰债" is on the verge of default.

From the article, Google Translated:
 July 21, "Investor News" reporter rushed to the center of the swirl of events - Huzhou in Zhejiang Jintai technology for on-site interviews. After multi-party investigative reporter found that the parties behind the conflicting interests of the bond is extremely complex.

"In fact, the crisis is not poor management at Jintai technology mainly due to the large number of affiliates and non-affiliated mutual guarantees, the source is Maoxing Zhejiang Chemical Fiber Co., Ltd. (hereinafter referred to as 'maoxing fiber') Recombinant failure caused a chain reaction. "Informed sources told reporters.

A chemical firm goes down and the daisy chain of mutual guarantee turns into a daisy cutter.

Also:
As of now, "12 Jintai debt" SME private debt market has become the only case of a material breach occurred.

I covered the topic, focusing on another private bond possibly headed for default, a couple days ago here: Credit Guarantee Firms Continue to Implode, Private Bonds Default

The article is long and complex, but you can get the sense of complexity and general mess of a situation from the Google translation 起底12金泰债:祸起联保 未来或申请破产保护
SMEs in the country's first private debt default "12 Jintai debt", opened a tip of the iceberg of private debt payment crisis. After the reporter field survey found that the payment of the crisis did not originate from bad company, but from the companies involved in multiple mutual UNPROFOR. Because companies involved extensive surface, once the local government involved.


  Kim Tae future technology will be how to resolve debt default crisis of? Multiple stakeholders disagree behind the events. Informed sources, as the government and banks Kim Tae Technology major creditors, the company might prefer to go for bankruptcy protection programs.

  "Investor News" reporter Wang Yang

  Recently, the first case of breach of SME private debt - "12 Jintai debt" brought to the cusp.

  "12 Jintai debt" includes two products, namely "12 Kim Tae-01", "12 Kim Tae-02" (hereinafter collectively referred to as "12 Jintai debt"), by Huzhou Jintai Co., Ltd. (hereinafter referred to as "Kim Tae Technology") in 2012 On July 10 issue, underwriters for the Zhejiang Securities. Two years later, July 10, 2014, "12 Jintai debt" failed to timely and full payment of principal and interest (total 33 million yuan), became the first single-material breach of the private bond market debt.

  July 21, "Investor News" reporter rushed to the center of the swirl of events - Huzhou in Zhejiang Jintai technology for on-site interviews. After multi-party investigative reporter found that the parties behind the conflicting interests of the bond is extremely complex.

  "In fact, the crisis is not the technology itself Jintai mismanagement, mainly due to the large number of affiliates and non-affiliated mutual insurance companies UNPROFOR, the source is Maoxing Zhejiang Chemical Fiber Co., Ltd. (hereinafter referred to as 'maoxing fiber') Recombinant failure caused a chain reaction. "Informed sources told reporters.

  In addition, the reporter learned from other interested parties, before and after the "12 Jintai debt" incident, the local government has to intervene, Zhejiang Securities has said that "the issue of private creditors if the pressure given by the local government for Kim Tae Technology." The current focus of the parties to the dispute focused on debt repayment to the relevant agencies when and whether the alleged violations of information disclosure.

  It is reported that, "12 Jintai debt" two products held by institutions, including Zhejiang Hankin Investment Management Ltd., Zhejiang Jinhaitang Investment Management Limited, Northern International( 14.65 , 0.05 , 0.34% ) Group Tianjin Investment and Development Co., Ltd. ((hereinafter referred to as the "Northern Investment Company"), the National Union Securities, Zhejiang futures, etc. which is a wholly owned subsidiary of Zhejiang futures Zhejiang Securities, the current positions 6.5 million yuan.

  "At present, the basic track Kim Tae Technology Operations, is actively discussing with creditors solution." Employee Miss Shi Tae Kim Tae Technology Chairman and technology assistant Miss Zhao told reporters, although a debt default, but the operational status of all Kim Tae Technology normal.

  Reporters then on "12 Jintai debt" issues related to the original call Kim Tae Technology actual control of Pan Jianhua, he told reporters that "the current inconvenient interview." It broke the news to provide information, the actual control or Kim Tae Technology has changed. October 2013, after Kim Tae Technology debt crisis, the company's second largest shareholder in the Energy Conservation Industry Development Co., Ltd. (hereinafter referred to as "energy") management committee composed of other PE Pan Jianhua fact instead of taking over the company.

  Kim Tae future technology will be how to resolve debt default crisis of? Multiple stakeholders disagree behind the events. Informed sources on the "Investor News" reporter revealed that the PE as Kim Tae Technology Shareholders and major creditors - the government and banks, companies may prefer to go for bankruptcy protection programs.

  Woe from UNPROFOR mutual

  According to the company's official website reports, Kim Tae Technology is a metal and non-metallic material surface treatment technology research and development, production and sales-oriented high-tech enterprises. The company's main businesses include auto parts, plastic products, aluminum wheel plating, plastic plating, metal plating and so on. It had to be in 2009 to the Commission [microblogging] apply for IPO and listed on the Shenzhen SME board, but did not make the trip.

  Informed sources told reporters that the crisis is mainly due to Kim Tae Technology UNPROFOR mutual. Fiber source is maoxing reorganization fails. Local government involvement is also due to face events involved too broad.

  For maoxing chemical causes and consequences of the reorganization fails, a person broke the news to the "Investor News" reporter sent data show that in 2012, Huzhou City, the financial regulators had outflows in the thematic exchange meeting entitled "About enterprise funds strand breaks analysis of the situation of the "document. The documents show that Maoxing chemical was founded in November 2007, with a total investment of $ 25 million. But mainly rely on credit funds and private lending maoxing fiber during construction, due to the high financial cost, the profit can not cover the high interest, Maoxing fiber on February 28, 2012 cut-off. Meanwhile, Huzhou Xichang CNC Industries Ltd. (hereinafter referred to as "Xichang NC"), Kim Tae Technology, Yaohua Stainless Steel Pipe Co., Ltd. is a new chemical maoxing mutual UNPROFOR units, Maoxing fiber strand breaks resulted in a capital series of chain traceability and bank guarantee liability pressure loan issues, making these companies are facing cut risk.

  At that time, under the command of the Pan Jianhua, Kim Tae Technology is not only chemical maoxing mutual UNPROFOR units, while the Thai gold under his control group, but also with local businesses Huzhou Bao trade Limited (hereinafter referred to as the "great treasure trade") have loan Guarantee relationship.

  Xichang NC and large treasure trade belong to "Xichang line" actual controller for 丁林德, including large shareholders Xichang NC treasure trade, accounting for 4% of the shares. Because affected maoxing chemical incident, "Xichang system" guarantees its four companies retroactive liability so that the four companies have been affected to cease the brink.

  Since the Thai group worked great treasure of gold trade in Bank of Communications( 4.47 , -0.13 , -2.83% ) Huzhou Branch and CITIC Bank( 4.45 , -0.09 , -1.98% ) were secured loan Huzhou branch, due to large treasure trade bankrupt insolvent, Thai Gold Group's total generation in March 2012 Bao trade 40 million yuan to repay the loan, which is partially funded by a loan from the bank, the loan by Kim Tae Technology and Pan Jianhua were secured.

  Finally, because the situation can not repay the loan mutual insurance companies spate of UNPROFOR, leading Kim Tae Technology funding chain problems, and ultimately led to the "12 Jintai debt" can not be cashed situation.

  Deeply involved in local government

  Maoxing chemical chain reaction triggered by the case due to the huge amount of money involved in this process, the local government began to actively intervene, and before and after "12 Jintai debt" issue played a crucial role.

  According to the aforementioned insider, "Kim Tae Technology IPO was a quasi-local companies, to make Kim Tae Technology successfully listed, the local government has participated in its dealings with the debt crisis, the debt Jintai '12 'event behind the figure of the local government also . "

  Kim Tae Technology before July 2012 issue of private debt has introduced a number of PE stake, in order to ensure the smooth introduction of PE funds, local government plays an important role. In early March 2012, Shenzhen Fuhai Yintao Asset Management Limited (Kim Tae Technology introduced one PE, hereinafter referred to as "Fuhai Yintao") during the due diligence of Kim Tae Technology, found Maoxing fiber and Kim Tae Technology, Thai gold Mutual relations between groups and find out Maoxing chemical chain disruptions due to funding does not have the guarantee qualification. After Wuxing Township Central People's Government shall issue a letter Nagisa commitment "to located the company (Kim Tae Technology) south of the 105 acres of land as collateral, after the company as a bank loan collateral." This makes Kim Tae Technology the successful introduction of a number of PE.

  Kim Tae Technology appeared in the capital chain problem, Kim Tae Technology on behalf of the local government who has to pay 20 million yuan loan (back Huaxia Bank( 8.77 , -0.03 , -0.34% ) ), Pan Jianhua to Kim Tae Technology 6,000,000 shares held as collateral .

  The source told reporters: "Until the financial crisis erupted Kim Tae Technology, Zhejiang Securities project staff with Kim Tae Technology minority shareholders, private bondholders on many occasions and meetings, the vice president of the Zhejiang Securities, wind control department staff, down to the project managers have been emphasized, 'had taken over the project, as Kim Tae Technology releases the pressure of private creditors if the local government to give as a political task to undertake down'. "

  In addition, Huzhou City guard against financial risks to maintain a stable business leadership team had 16 April 2012 convened Bank of China( 2.71 , 0.00 , 0.00% ) , Agricultural Bank of China( 2.52 , 0.00 , 0.00% ) , Bank of Communications, China Merchants Bank( 11.02 , -0.05 , -0.45% ) , Huaxia Bank, Huzhou banks, rural cooperative banks Wu, nanxun bank officials and business executives in charge of convening the Kim Tae Technology, Hetejintai, Thailand Golden Group (subject to Pan Jianhua control) three corporate loans restructuring negotiations will.

  The meeting clearly "Kim Tae Technology companies should ensure the normal operation of the production, its name has been a sum of 10 million yuan China Merchants Bank overdue loans, the company promptly raise funds to repay the 20th month, on this basis, please continue to work with China Merchants Bank strengthen provincial branch communication, before the end of the credit scale to give Kim Tae Technology support 10 million yuan of; and requested the relevant banks to maintain Kim Tae Technology, the existing loan size Hetejintai and Thai Gold Group, do not smoke loan, the loan is not pressed, the related loan maturity turnover, you can use the city emergency working capital. Municipal Finance Office in consultation with the Municipal Finance Bureau to support the company's introduction of relevant policies. " Kim Tae local government support of science and technology is evident.

  Zhejiang Securities suspected of concealing the truth

  Throughout "12 Jintai debt" event, in addition to "12 Jintai debt" default is not on time payment, the creditor even more outraged that the disclosure of information is extremely relevant agencies are not in place. Broke the previous person told reporters: "the relevant agencies suspected of concealing important information, constitute fraudulent sales." In addition, Kim Tae Technology also work bond underwriters Zhejiang Securities expressed dissatisfaction.

  Artificial reporter broke the news agency cited several examples of allegedly concealing important information.

  First, the "12 Jintai debt" issue, the subsequent occurrence of overdue bank loans, the CBRC notification, etc., Zhejiang Securities project staff knows this, but did not disclose the information to bondholders.

  Second, within the "12 Jintai debt" bonds for six months, the staff Zhejiang Securities Shi Jian, Lu Min, Zhou Liang, Hua Jia have repeatedly went to Kim Tae Technology survey, Pan Jianhua, Zhao's former secretaries and former Chief Financial Officer Ru a reception, Kim Tae Technology external guarantee liabilities of such persons are aware of the serious situation, but not until March 2014 were not disclosed and communicated to the bondholders.

  Third, in December 2012 the strategic investors into the bank Zhejiang Jintai technology accounts 36 million yuan investment funds in the process of pumping revolving loan loan. Staff Zhejiang Securities Skinner went to the bank for more details Zhejiang, Zhejiang Governor of the Bank confirmed this, but did not timely disclosure of Zhejiang Securities and notification to bondholders.

  These circumstances bondholders until March 2014 before it knows.

  For the above cases, the interim head of Zhejiang Securities "12 Jintai debt" external information disclosure Dai Xiang told reporters: "Kim Tae Technology private debt was recommended by the local government project, we had to go to banks and companies to do the investigation and did not find the current time Investors reflect these circumstances, these cases we also later learned from the investor at, but we have to wait for its authenticity reply to the relevant regulatory authorities. "

  In addition, according to the reporter Pan Jianhua get a personal credit report, Pan Jianhua personal credit report has been repeatedly during downshift inquiry before issuing bonds and bonds, the vast majority of searchers banks, including "Huzhou City Commercial Bank "" China Minsheng Bank( 6.57 , -0.08 , -1.20% ) Hangzhou Branch "," Zhejiang Wu rural cooperative banks "," Zhejiang Huzhou bank branches "," branch of the Agricultural Bank of China Huzhou Wu "," Bank of East Asia (China ) Co., Ltd. Nanjing Branch "and so on, because the query is more than a" loan management, "" guarantee qualification "," loan approval. " For these cases, a creditor Ning (a pseudonym) said: "Zhejiang Securities does not tell creditors a similar situation."

  Ning told reporters the information provided, the Pan Jianhua actual control of Kim Tae Technology, Hetejintai, Thai Gold Group, the three companies before issuing bonds and bonds occur during liabilities pan (such as for maoxing fiber, Tai Po and trade and other corporate guarantees, shifted to the debtor is insolvent when the secured party) majority is repaid by the Thai Gold Group, while the translation by Kim Tae Technology and Hetejintai and Pan Jianhua and other guarantees, since the Thai Gold Group insolvent, ultimately translate to the Kim Tae Technology.

  Ning told reporters: "According to Kim Tae Technology PE shareholders Fuhai Yintao chairman Wu Jie Si private bondholders convened briefing held this year on April 13 (Zhejiang futures representatives also participated in the meeting) on ​​publicly available materials, Pan Jianhua from 2008 began to financial fraud, to issue bonds before, fictitious revenues and profits 30 million yuan or more. "

  In addition to the underwriters, responsible for auditing CPAs also questioned the creditor is not responsible. In this regard, Wang Ning told reporters: "A lot of critical information we later learned in Tianjian audit report did not reflect, we are also considering to pursue Tianjian responsibility."

  In addition, local banks are also involved, another person familiar with Mr Chong told reporters: "Zhejiang Securities had told us on the loan card Jintai technology to provide mutual UNPROFOR did not have information, according to the central bank [microblogging] provisions This information must be entered, this is probably intentional local banks, the water is too deep behind. "

  Kim Tae Technology or filed for bankruptcy protection

  As the relevant creditor agency is not considered as a cause of their buying in the case of asymmetric information, therefore, the parties to the debt arising from either way divergence, fear has become the current impasse.

  Reporter (a pseudonym) Department learned from a private creditor debt Li Wei, the former "12 Jintai debt" breach of contract, Kim Tae Technology's current Shareholders have raised amortization program, specifically for principal and interest payments from the beginning of 2015, over four years pay an annual payment of principal of a quarter, interest rates according to the original agreement executed. However, because the time is too long and there is no guarantee the program has not been relevant creditors accepted.

  In addition, creditors have tried to find a third party to access disk. Mr Chong aforementioned insider told reporters, "In March this year, Kim Tae Technology can not find redemption, the Zhejiang Securities tried to find Cinda Asset Management Company as a third party to accept the relevant creditor claims, but later because the condition is not Tanlong cause not below. After the relevant creditors had taken the initiative to find a third party to take over, but due to third-party companies to find the requirements to provide a certain amount of advance deposit and give up. "

  However, as one of the creditors northern state-owned investment company with the background, the "12 Jintai debt" breach involving the loss of state assets, a source close to the northern capital firm who told reporters, "If the matter is not properly resolved, Northern Investment The company's legal department goalkeeper intervention legal liability related personnel. "

  Although there is no ability to repay debt, but Kim Tae Technology's current operations began to turn good. Reporters and staff from the company Miss Dong Mizhao Miss Shi Department learned that Kim Tae Technology a few years ago because of funding chain problems indeed lead to business operations are affected, but the company is currently operating in the slowly improving.

  In addition, the reporter from "12 Jintai debt" creditors Wei also confirmed the information learned at this point. Wei told reporters: "At present, the PE side has taken to us to convey the message that companies currently operating normally no problem, according to the current operating conditions, the future of science and technology is the ability to Jintai reimbursement." In fact, the actual control of Kim Tae Technology People change has occurred. Wei said that "management committee composed of energy-saving and other PE fact escrow company."

  Kim Tae future technology will go from here? "Private debt creditors do not want to go bankrupt liquidation Kim Tae Technology if bankruptcy liquidation, creditors get the compensation will be extremely limited. Currently chairman of the shareholders of Fortune silver Tao Wu Jie Si Tae technology is very good bankruptcy reorganization, if there is no feasible solution , the future does not rule out bankruptcy procedures go. "Mr Chong told reporters," but, due to the more than two-thirds of unsecured creditors matter for the local government and banks, therefore, the initiative is not in the hands of private debt creditors. Comprehensive more likely Kim Tae Technology's current operations, Kim Tae Technology PE Shareholders and local governments and banks to Jintai technology for bankruptcy protection. "

  The so-called liquidation, is the liquidation of assets, closing debt. The bankruptcy protection is similar to the "airbag" when the accident occurred, may play a role in buffering. During the bankruptcy, the creditor can not enforce the debt, the debtor can still operate as usual.

  Concern is that before the financial crisis has exposed Kim Tae Technology, Zhejiang futures in March last year to 6.5 million yuan will be held by the scale of "12 Kim Tae-01" by the Shanghai Stock Exchange [microblogging] sold to another brokerage platform for sale - National League securities (Note: A total of 13 million yuan holdings "12 Jintai debt" Before Zhejiang futures sold). According to sources close to the League of Nations Securities, told reporters, "president of the League of Nations and the Securities president of Zhejiang Securities is the relationship between students."

  Reporter Contact Zhejiang Securities is responsible for "12 Jintai debt," the project leader Zhang Hui, Zhang Hui told reporters that "the company is discussing solutions, not convenient to disclose details."

  SMEs welcome private debt payment peak

  In fact, "12 Jintai debt" breach may just tip of the iceberg, as the representative of SMEs in its private debt is caught in a collective payment storm.

  May 22, 2012, both the Shanghai and Shenzhen Stock Exchange issued a "SME private debt business pilot approach" (hereinafter referred to as "" pilot approach ""), known as the "Chinese version of junk bonds," the official launch of the SME private debt . According to private debt common period of 2 years, in 2012 the first issue of private debt about to come due, the first wave of cashing peak has arrived.

  With the payment of the peak season, a variety of payment crises have also surfaced. Since March there have been "13 sen debt" payment crisis, "12 Walters" in honor uncertain prospects, "13 Huatong Bridge CP001" current payment crisis and other reports, but has not been reported in the newspapers of the "12 Jintai debt" but became the first case of small and medium private debt default cases. The evening of 21 July, the Central Depository Trust & Clearing Co., Ltd. (hereinafter referred to as "debt Gordon") announced that, effective immediately, the suspension of the "12 Kim Tae-01" and "12 Jintai 02" These two bond valuations. Gordon said in debt, private debt information disclosure in view of SMEs opaque and the issuer's financial and rating information were unable to obtain from public sources, has been unable to grasp the latest developments of the event, so the suspension of two bond valuations.

  As of now, "12 Jintai debt" SME private debt market has become the only case of a material breach occurred. This year in April, "13 in Tucson debt" has appeared cashing storm, after the adoption of the guarantor Hisense fulfill guarantee obligations to investors; March since "12 Waters" event of the issuer bankruptcy reorganization have not yet turned the corner, had been closely watched Watertown Road and Bridge Group's short margin (13 Watertown Road Bridge CP001) principal and interest payment crisis turnaround in the afternoon of July 23, or pay all principal and interest.

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