Less than seven months ago, an investor consortium led by an obscure Chinese energy conglomerate reached an ambitious deal to buy one of Hong Kong’s landmark skyscrapers for a record-setting price.
Not long after, the Beijing-based conglomerate known as China Energy Reserve and Chemicals Group backed out of the $5.2 billion deal, and this month it defaulted on a set of U.S. dollar bonds.
A subsidiary of the group said in a regulatory filing that it failed to repay the principal amount on $350 million in three-year dollar bonds that matured on May 11. The missed payment triggered default provisions on $655 million in other debt securities that were due to mature in 2021 and 2022.
The privately held group blamed a “tightening in credit conditions” in China over the past two years, which it said restricted its access to financing channels such as bank loans and onshore bond sales. The group’s increasing cash flow and capital requirements “resulted in a liquidity crunch” that led to the default, it added.
The group said it plans to continue business operations while working to divest some assets to alleviate its cash-flow issues.
Little is known about China Energy Reserve and Chemicals Group, which is principally involved in the oil-and-gas industry. The Wall Street Journal reported last November that one of the conglomerate’s owners is an entity linked to China’s Communist Party. At the time of the deal for the Hong Kong skyscraper, called The Center, a China Energy Reserve and Chemicals executive told the Journal that the group was responding to China’s call to explore the overseas market. He didn’t respond to a request for comment on Monday.
After the Chinese conglomerate pulled out of the deal for The Center, other investors stepped in to take its place in the consortium purchasing the building.
The bond default marks the third time this year that an Asian company has defaulted on its U.S. dollar debt. Earlier this month, Hsin Chong Group Holdings Ltd., a property developer that does business in China and Hong Kong, didn’t repay $300 million in three-year bonds. Singapore-listed commodities trading firm Noble Group also defaulted on dollar bonds this year.
“Investors should prepare themselves for more defaults from China,” said
chief investment officer for Asian fixed-income investments at Invesco Asset Management in Hong Kong.
Borrowing costs in China’s bond market have risen sharply over the past year after Beijing pushed up key short-term interest rates and significantly narrowed access to shadow banking and informal lending channels crucial to the survival of smaller companies. That has left debt-laden firms such as property developers vulnerable to defaults if they are unable to refinance their loans and bonds as they come due.
So far this year on the mainland, a total of 11 issuers have defaulted on a combined 16.7 billion yuan ($2.6 billion) in local-currency corporate bonds, up from nine issuers and 14.3 billion yuan in debt in the same period last year, according to data from Wind Info. While the numbers are rising, bond-default rates in China are still low by global standards.
“We have started walking back in time,” said Owen Gallimore, head of credit strategy at ANZ in Singapore, referencing a string of large dollar bond defaults in 2015 that were led by Chinese property companies.
—Wenxin Fan contributed to this article.