After a struggle to repay its debts since 2015, Guangxi Nonferrous Metals Group, a regional Chinese state-owned metal producer, has finally been declared bankrupt by a Chinese court, becoming the country’s first interbank bond issuer to fail. It is also China’s first bankruptcy case in which a state-owned company has liquidated. As Caixin first reported, nine months after the state-owned Guangxi first filed for bankruptcy, a Nanning court on Sept. 12 granted the company’s application to liquidate.
What makes this bankruptcy unique is that while several state-owned enterprises have already gone bankrupt in the past two years due to a failure to repay bank or corporate debt, until recently an unheard of event in China, Guangxi Nonferrous is the first SOE to fail after defaulting in the highly liquid interbank bond market.
The implications will be substantial in a market in which the central bank “put” when it comes to bond issues, had been pervasive until recently.
According to Caixin, the bankruptcy will likely deter foreign investors from China’s bond markets, which are facing increasing risks of default as the country embarks on supply-side reform to cut industrial overcapacity. More than 30 bonds have defaulted as of June, according to data provider Wind. Dongbei Special Steel, a producer of alloys for automakers and other manufacturers, defaulted on seven bonds with a combined value of 3.1 billion yuan between March 28 and late July.
The Guangxi Nonferrous bankruptcy had been closely followed as a case study of how China will resolve complex bankruptcies that mixed private and public funding.
Based in the southern Guangxi region, the company succumbed after three years of losses and, despite government subsidies, failure to repay its debt. Problems started to surface in June 2015 when the metals company said it was having trouble repaying rmb 1.3 billion of principal and rmb 62.92 million of interest on its private placement note.
Despite a subsequent bailout by its lender, China Development Bank, one of the country’s three policy banks which later stepped in to rescue Guangxi Nonferrous, the metals maker defaulted, again, just a few months later on three other bond payments that were due in November, February and most recently in April, when it missed payment on a rmb 500 million yuan 3 year private placement note with a 5.56% coupon (which was rated BB). The metals producer cited in the notice “consecutive losses and the fact that it has already entered bankruptcy reorganization procedures” as reasons for the missed payment.
Which is a valid point: you can’t go more bankrupt if you are already bankrupt.
Based on company filings, Guangxi Nonferrous owed a total of rmb 14.51 billion to 108 creditors, including China Development Bank, Minmetals International Trust and Shanghai Pudong Development Bank.
Founded less than a decade ago in 2008 by the SOE regulator State-owned Assets Supervision & Administration Commission (SASAC) in Guangxi, the company engaged in mineral exploration and mining development. But its troubles started long ago, when it reported a combined loss of rmb 2.29 billion from 2012 to 2014 as the industry was struggling with declining demand and a supply glut amid an economic slowdown. “The nonferrous metal industry has been in a downturn, and also the company faced limited returns from previous investments,” said a person close to the firm cited by Caixin, adding the two factors eventually led to a negative cash flow.
Despite its second default in early 2016, the company was once again given a 6-month leeway by the government to find a way to continue as a going concern, preferably with a vastly deleveraged balance sheet. In a February statement to the Shanghai Clearing House, a government financial institution for the interbank market, the metals company said it filed an application for bankruptcy in Nanning Intermediate People’s Court in December. However, the court gave the company a grace period of six months and set up a committee made of local government and party officials to restructure the debts.
However, the third time would not be the charm for the insolvent, cash-bleeding SOE: a person inside Guangxi Nonferrous told Caixin that the committee reached out to more than 100 investors to bail out the firm, but only five expressed interest. No deals were reached.
Creditors apparently were dissatisfied with the results of the negotiations and blamed their failure on the local SOE regulator. “As far as we know, Guangxi SASAC did not provide any detailed plans or give any promises to potential investors,” one creditor said. “Inviting investors was just a formality.”
In August, creditors submitted a written complaint to the National Association of Financial Market Institutional Investors, which oversees the interbank bond market, accusing the reorganization committee of ignoring creditors’ interests. “The committee did not follow rules to reveal information regarding the restructuring to the public; neither did it communicate with creditors.”
“The key question now is how much money bondholders can claim,” said Ivan Chung, managing director and head of China credit research at Moody’s Investors Service in Hong Kong. Citic’s Ming expects that the “the claim ratio for creditors will not be high.”
And thus concludes China’s ad hoc attempt to implement Chapter 11 reorgnization in a corporate culture that has rarely if ever dealth with multiple stakeholders seeking to split apart a bankrupt entity. In liquidation disaster.
According to Caixin, it is not clear how Guangxi Nonferrous Metals will be liquidated. According to China’s Company Law, the court will administer a bankruptcy auction to sell the company’s assets. The gains will be used to pay employees first, then taxes and eventually creditors. The restructuring committee estimated that the company will need to raise 16 million yuan from the auction to pay around 110 employees. The payment is calculated based on how long an employee worked at the firm and the average salary for the 12 months before the bankruptcy, the person inside the company said. The decision has upset some employees because the company reduced the average salary by almost 50 percent at the beginning of this year.
Where it will get hairy is once the company’s already unhappy workers realize there is no more job for them. “Employees are still calm, but once the liquidation plan becomes clear, I’m afraid the conflict between the company and the workers increase,” the Caixin source said.
And while one liquidation of a SOE will be manageable, even if it means all workers have to be transplanted elsewhere, what happens next, now that the seal has been broken, and many more state-owned companies follow in Guangxi’s footsteps. Can China keep a lid on all the upcoming “conflicts between company and workers”, which as we have said since 2013, is the main reason why China is so terrified of terminal corporate failure.
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