Another Default, Another Credit Guarantee In Play: Jiangsu Dahong Textile

A private SME in Jiangsu, Jiangsu Dahong (江苏大宏纺织集团股份有限公司), has missed a bond payment and has yet to contact investors. Besides missing a bond payment, the company has overdue loans with banks.

The bond in question is a $300 million 3-year bond (with a 2 year sell-back option) issued in 2013. The bonds were originally rated AA- and are now rated CCC.

Dahong's business has stagnated and the firm cannot fund the debt from its normal operations.

Sheyang Investment and Development Co. has unconditionally guaranteed the debt of Dahong. Sheyang also provided $60 million in land as guarantee. However, after default, Sheyang has provided no compensation.

Offering documents show that as of the end of 2012, Dahong had total assets of 1.461 billion yuan, total liabilities of 744 million yuan, 717 million yuan of shareholders' equity; in 2012 the company had operating income of 1.317 billion yuan and 110 million yuan in profit.

But the latest rating report shows that, as of the end of September 2013, total assets were 761 million yuan, down by almost half, and from January to September 2013, total profit was 19 million yuan, down almost 4-fold.

Creditors have met and are investigating to see if the assets in 2012 were fraudulently reported or if assets were illegally transferred out of the company later.

Besides the overdue bonds, Dahong has overdue bank loans worth 246 million yuan.

Of the 300 million bond, 162.8 million was to be used to repay bank loans, the remained used for working capital.

A supplementary agreement explains why Sheyang provided the unconditional guarantee: Sheyang took 180 million of the bond proceeds.

Currently, Sheyang says it can repay the 180 million, but hopes investors can give it a 3 year grace period to repay creditors the other 120 million.

At the end of 2013, Sheyang had total assets of 6.068 billion yuan, equity was 3.42 billion yuan, asset-liability ratio 43.63%; total revenue was 610 million yuan, profit was 140 million yuan.

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