Last-minute bailout saves firm from default

SHANGHAI - A construction firm in Northwest China Shanxi province narrowly avoided what could have been the first default in China's interbank bond market, after local authorities and the company repaid principal and interest due on Wednesday.

Sources close to the bond's underwriters said enough funds were available to cover the principal and interest of the one-year commercial paper, totaling 429.2 million yuan ($69.15 million).

The privately held Huatong Group claimed in a statement issued on July 16 that it faced "uncertainties" paying back the principal and interest of its 400 million yuan note.

The possibility of a default emerged after the company's board chairman Wang Guorui was stripped of his membership from the local political advisory body on July 10 for allegedly breaking the law.

The one-year note, recently revised down by domestic rating agencies to B from A-1, was due with an annual interest rate of 7.3 percent.

In early March, Shanghai Chaori Solar Energy Science & Technology failed to cover 89.8 million yuan in interest payments, making it the first onshore bond default and caused a minor panic among investors.

Authorities have signaled since late last year that it would tolerate defaults as long as such incidents do not bring systemic risks to the country's financial systems.

Companies have long relied on local government and state-backed lenders for last minute bailouts to help meet their obligations when they run into liquidity problems.

Such bailouts have been criticized for causing distortions in the market and preventing investors from getting a clear look at the risks they are exposed to.

Unlike Chaori, whose bond is traded at the Shenzhen exchange, Huatong's note is traded in the interbank market, which according to Standard Chartered, accounts for 93 percent of outstanding bonds issued in the onshore market.

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