A major Chinese clothing maker revealed Monday that it failed to repay investors on a $ 153 million bond, the latest in a series of defaults that rocked the corporate bond market of the country’s $ 4 billion.
Shandong Ruyi Technology Group, which has struggled to cope with heavy debt after a series of high-profile international acquisitions, said in a deposit that it had failed to repay principal and interest on a RMB 1 billion bond that was due Monday.
The privately held company, based in the coastal province of Shandong and sometimes referred to as “LVMH of China,” has accumulated a total debt of more than $ 4 billion over the course of pick up control stakes in famous brands including sportswear manufacturer The Lycra Company and Savile Row tailor Gieves and Hawkes.
He joined a growth list of default values in China’s onshore debt market, which started in early November with a missed payment by the government Yongcheng Coal and raised questions about state support for local government debt, long viewed by investors as implicitly guaranteed.
Shandong Ruyi is not state-owned, but still felt pressure from Beijing’s growing support for debt issued by regional and local governments, which previously had wide latitude to borrow heavily in order to maintain rapid economic growth. .
After the clothing company negotiated with bondholders to delay the annual interest payment it missed in March, the company hoped for a bailout from Jining City Urban Construction Investment, a Shandong-based local government finance vehicle.
But in June, this financing vehicle ad he was pulling out of an October 2019 deal to buy a 26% stake in the company.
Local government funding vehicles have come under more scrutiny and have therefore come under pressure to reduce risky investments, said Michelle Lam, China economist at Société Générale.
Ms. Lam said Shandong Ruyi’s default highlights the risk of cross-guarantees between government-related companies and private companies in China, “which may increase the risk of financial contagion.”
Financial pressures could become more focused next year as China’s economic recovery continues, likely prompting policymakers to tighten liquidity conditions, she said.
Erik Lueth, Senior Emerging Markets Economist at Legal & General Investment Management, added that “allowing this type of default every now and then” was “part of the strategy. [China is] seek to introduce more moral hazard into the system ”. “It’s a two step forward, one step back approach,” he said.
Shandong Ruyi has an interest payment on another RMB 1 billion bond, also traded on the Chinese onshore market, due Tuesday.
The group’s international debt is also trading at troubled levels. The price of a $ 300 million bond issued by subsidiary Prime Bloom Holdings due 2022 has fallen to 20 cents on the U.S. dollar, according to Bloomberg data.
Moody’s rating agency downgraded Shandong Ruyi’s issuer in March to Caa3 from Caa1, indicating that the group carries “very high credit risk”. It also downgraded the rating of bonds issued by Prime Bloom to Ca from Caa2.
The rating agency said its move reflected “a tightening of the liquidity position and high refinancing risk amid heightened economic uncertainty,” with “significant” debt maturing in the 12-18. next months.
Additional reporting by Jonathan Wheatley