Chinese issuers turn to bond exchanges as repayment pressures build

A Chinese manufacturer of industrial equipment has become the first company in the country to conduct a bond exchange offer in its exchange-traded bond market, marking a step toward simplifying debt restructurings as default risks rise.
Under bond exchange offers, bond investors receive new bonds, rather than cash, when a bond matures. Previously, Chinese issuers were able to roll over maturing bonds through the issuance of new instruments, but bond exchanges simplify the process.
Huachangda Intelligent Equipment Group Co Ltd, which makes automation equipment for applications including automobile assembly lines, said late on Wednesday that it had completed an exchange offer that day for an 8.5% bond traded on the Shenzhen Stock Exchange maturing March 22.
The exchange offer for new 8.5% bonds maturing in March 2021 was taken up by two bondholders accounting for 155.41 million yuan ($21.98 million), or about 65% of the face value of outstanding bonds, the company said in a statement.
The company is based in central Hubei province, the epicentre of China's coronavirus outbreak. Much of the area has been in lockdown since mid-January but curbs are slowly being lifted.
"As the company is an enterprise in the Hubei province coronavirus disaster area, the success of this partial exchange will assist the company's cash flow arrangements and have a positive impact on production and operation," it said.
The exchange follows a downgrade of the company's issuer rating by China Chengxin Securities Rating Co in February to BB+ from BBB+, indicating a relatively high risk of default. China Chengxin cited factors including falling revenues and significant asset impairment provisions.
The exchange offer by Huachangda follows an exchange in China's interbank bond market on March 6 by Beijing Sound Environmental Engineering (BSEE), a sewage treatment facility manufacturer that had warned of a possible inability to repay 500 million yuan in maturing bonds due that day.
"BSEE's debt exchange opens a more efficient path for onshore bond resturcturing than other existing post-default options, which generally lack market transparency and tend to drag over a lengthy period of time," Fitch Ratings said in a report this week.
"There is no basic difference between these exchanges and rollovers, but it reduces the work for issuers to find investors," said a senior brokerage source in Shanghai. Huachuangda may have completed the first exchange-traded corporate bond exchange offer in China, but analysts expect more to come as Chinese issuers continue to face significant repayment pressures, exacerbated by the coronavirus pandemic that has taken a heavy toll on the world's second-largest economy.