Stepping on thunder is more because of belief in state-owned enterprises
Open pit coal storage yard in a large coal mine in Yong coal mine area. Picture / visual China
On the afternoon of November 17, the temperature of Zhengzhou dropped sharply after the moderate rain. Although the interest of more than 32 million yuan of 20 Yong coal scp003 has been cashed the previous day, it has not eased the atmosphere in the 17th floor meeting room of Henan energy and Chemical Group Co., Ltd. (hereinafter referred to as Henan energy), and the payment of interest is regarded by some creditors as just reflecting themselves, not escaping or abandoning debts.
In fact, among the more than a dozen creditors present on that day, only a few actually held the 20 Yongmei scp003 which had already broken the contract, and more held the unexpired bonds of Henan energy or its subsidiary Yongcheng Coal and Power Holding Group Co., Ltd. (hereinafter referred to as Yongmei Holdings), seeing that the lead wire has been ignited, I dont want to stay in the office, so the pressure is too great..
The lead was ignited a week ago. On November 10, Yongmei holdings announced that due to the shortage of working capital, it failed to raise sufficient funds on schedule, and 20 Yongmei scp003 constituted a substantial breach of contract. As Henan energy and Yongmei holdings all had cross protection clauses in their public offering bonds of 26.5 billion yuan, if the principal and interest of 20 Yongmei scp003 were not fully repaid within 10 working days after the default, the cross protection clause would be subject to Trigger. How can you not be nervous. If you want to explode, it will explode. A creditor holding Henan energys winning vote due next year told China News Weekly.
After a one-day wait on November 16, creditors met again with Henan energy management on November 17, but the number of creditors present dropped sharply compared with November 12. Some creditors recalled to China News Weekly that there were at least 40 or 50 creditors present on the 12th, which could be called a big gathering of financial institutions. The scene was once fierce, and representatives of financial institutions questioned Henan energy staff, who owes whom? It was also at the meeting on the 12th that Henan energy management personnel promised to strive to collect 1 billion yuan to repay the principal within 10 days.
After the substantial breach of contract of 20 Yongmei scp003, the market immediately questioned: why Yongmei holdings still issued a period of RMB 1 billion medium term notes on October 20, even though it was unable to repay the principal of RMB 1 billion, especially its announcement of free transfer of equity of high-quality assets of Zhongyuan bank in early November triggered doubts from the outside world on whether it constituted debt evasion or not. As a matter of fact, the capital chain of Henan energy, the parent company of Yongcheng Coal Holding Co., Ltd., and the largest national enterprise in Henan Province, is already very fragile. In the words of a person from the self-supporting Department of a securities firm, the problems are all on the surface..
The real game point of the market is whether the government will save or not?
Yongmei holdings issued 20 Yongmei scp003 as the time point of substantive default announcement, which was questioned by some creditors as premeditated.
Just a week before the announcement of substantial breach of contract, Yongmei holdings issued a cashing announcement of 20 Yongmei scp003 on November 3, and issued a 1 billion yuan winning vote on October 20. Knowing clearly that the capital chain may be broken, why do you still need to raise funds? An insurance company asset management department questioned that. By the end of March 2020, Yongmei holdings announced that its monetary fund balance still had 48.614 billion yuan, which rose to 49.978 billion yuan in the middle of this year, but why could it not repay the bond principal of 1 billion yuan?
A person from the capital section of Yongmei holdings disclosed to China News Weekly that as of the end of September, there were still more than 47 billion yuan of monetary funds, but mainly restricted funds, for example, some loans, the margin of notes, can not be used.. Moreover, before the default of 20 Yongmei scp003, Yongmei holdings did not keep any funds in its daily account. The funds are cleared daily and collected to Henan energy. We need to apply for the use of funds, which should be approved by the group level.
Before 2018, Henan energy only collected funds from its subsidiaries on a regular and on-demand basis. In recent years, due to the tight cash flow and the great pressure to repay debts, Henan energy has collected funds every day. A Henan energy insider told reporters that the debt is unified borrowing and repayment at the group level, and it can be seen from the issuance of bonds that the Yongcheng Coal Industry is bound to cooperate unconditionally.
The issuance of Yongmei holding bonds is basically initiated by Henan energy. After going through the process, we will tell them that they must issue the bonds. A person who once served as the lead underwriter of Yongmei holding bonds told reporters that Yongmei holdings had funds which were collected in Henan energy and lent to other subsidiaries. A Henan energy management also admitted that in addition to the restricted funds, some of the funds of Yongmei holdings were borrowed by the group.
This can also explain why many creditors gathered in Henan energy after the explosion of 20 Yongmei scp003, and the holding account of Yongmei did not have money, while Henan energy had only 100 million yuan of cash to use.
Before the bond explosion, risks appeared in the banking and non-standard business level at least in September this year. In terms of the interest bearing liabilities of Henan energy, bank loans account for about 140 billion yuan, and the balance of bonds is about 50 billion yuan. In addition, there are more than 50 billion yuan of non-standard business.
Henan energy insiders said on November 19 that although only 20 Yongmei scp003 has actually breached the contract, and the bank and non-standard business have not yet breached the contract, some due principal and interest have not been paid and have been in communication. After the opening of the banks debt Committee on September 20, the bank has basically negotiated the adjustment of interest settlement methods. Some interests are settled once a year or half a year, while others are cleared with the principal, while financial leasing companies are communicating with each other.
Behind the fracture risk of Henan energy capital chain is the pressure of debt repayment. Since this year, Henan energy has paid off 14.3 billion yuan in net. In terms of bonds, although Henan energy has no bonds due within the year, Yongmei Holdings has defaulted on its 3 billion yuan bonds due in November, and another 3 billion yuan bonds mature in December.
However, the financing channels of Henan energy are constantly narrowing. According to China Newsweek, the bank still has new credit to Henan energy in the first half of this year, but the amount of new credit in the third quarter has been very small.
A broker said, we almost helped Yongmei issue a bond in October, everything was ready, and finally they didnt find the money themselves. In fact, since the second half of this year, the bonds issued by Henan energy are basically purchased by financial institutions in Henan Province, local financial institutions have been filled up, basically reaching the upper limit.
In the case that the financing channels have been basically exhausted, Henan energy has been through the squeeze wage repayment. The group level has owed five months wages, and front-line workers still owe two months. Some employees social security may only be paid until May this year. Henan energy insiders disclosed to reporters that employees of some subsidiaries had more arrears of wages in the early stage, so they could only work outside as part-time workers. Employees who started early could still find some temporary jobs, and some employees could not even find such jobs. When communicating with some creditors on November 19, the management of the company said frankly that the cost of monthly wages was about 800 million yuan, arrears of wages is to protect bonds and maintain a good image of the market.
According to the above-mentioned insiders, in order to repay the debts, Henan energy even used the funds for safety production, this fund is generally not allowed to be used, but there is really no way to do so. It has been reported to the provincial government. No money can be drawn from production and operation.
Dragged down by chemical industry?
Why has the largest state-owned enterprise in Henan Province with 180000 employees come to this stage?
Compared with last year, the average price of a ton of coal from January to October has dropped by more than 30 yuan. A Henan Energy Insider talked about the price of coal produced by permanent coal, said that the decline is not small, coal prices are rising recently, but the price was not high a period ago.
Yongmei a negative 500 meters deep coal mine underground mining site. Pictures / China Singapore
Yongcheng is located at the junction of the four provinces. The coal produced is transported to Baosteel and WISCO relatively close. Yongchengs coal is not difficult to sell at all. At that time, we did non-standard business to investigate the mining area, and it was spotless. The tramcars pulled coal out one by one. Said a person from the asset management company.
From the perspective of financial data, it is true that from 2017 to 2019, the coal production and sales volume of Yongmei holdings continued to grow, and the coal business income increased from RMB 18.911 billion to RMB 22.988 billion. In fact, the operating condition of Yongcheng Coal Co., Ltd. has been very good, said an energy management official in Henan Province. At present, Yongmei is basically producing at full capacity, and the majority of the payment is in cash, because at the beginning of the year, we required that the proceeds from coal sales should be mainly in cash to repay debts.
According to him, the collection is not every day, and the normal production and operation of Yongmei still needs some funds. Under normal circumstances, the average daily net capital inflow may be more than 10 million yuan, and the cash flow of Yongmei is still relatively large. And a broker told reporters that Yongmei is a chicken laying golden eggs for Henan energy.
In fact, the real drag down Henan energy and Yong coal holding or chemical plate. This can also be seen from the financial statements of Yongmei holdings. In the non coal businesses such as trade, chemical industry and nonferrous metals, the chemical business income decreased by 29% year-on-year last year, and the gross profit margin of Henan energy and chemical industry business even turned negative in 2019.
The original chemical plate did not divest, the annual net profit also has several hundred million, after the chemical plate divestiture, the capital flow should be able to enlarge. The above-mentioned permanent coal holding capital branch personnel told reporters. On November 2, Yongmei Holdings has stripped off the chemical sector as a whole.
Henan energys chemical sector continued to lose money. Some insiders told China News Weekly that the chemical sector brought about a net loss of nearly 4 billion yuan a year. In fact, except for the chemical business, which does not make money, all other businesses make money. It is just a matter of making more and less. As a result, the net profit of Henan energy has been negative since 2017, with a loss of more than 2 billion yuan last year and a loss of more than 1 billion yuan in the first quarter of this year alone.
And Henan energy management also admitted that part of the capital collected by Yongmei holdings to Henan energy was lent to the chemical industry sector with serious losses of the group.
And a self-supporting Department of a securities firm said frankly, if we really talk about the root, its not bad for the enterprises. The problems are all on the surface. Its just a matter of when the government wont save it, because its been rescued all the time.
Save or not?
After the 20 Yongmei scp003 constituted a substantial breach of contract on November 10, in 10 working days before the formal triggering of the cross protection clauses of many existing bonds, creditors repeatedly thought that there is not much time left for Henan energy, but it failed to wait for the clear signal of the governments rescue.
It was really difficult for them in September, but in October the government had a series of bail-out and capital injections. A securities company asset management department told China News Weekly.
On October 5, the Party committee of the state owned assets supervision and Administration Commission of the Henan provincial government made a report on the resolution of energy debt risks and the reform of Henan Province. This red head document was regarded as the beginning of a series of signals released by the government in October to support Henans energy policy. At that time, the market had heard the negative news, but after all, the government came forward to make a statement, and the enterprises also felt confident when they went to the enterprise research. Said the securities firm asset management department.
Subsequently, at the mobilization meeting for Henan energy reform on October 16, Liu Yinzhi, chairman of the board, disclosed that the provincial government decided to increase 15 billion yuan for Henan energy in cash, assets and other forms in batches. At present, the capital increase of 6 billion yuan has been completed, and the rest will be in place as planned.
At the end of October and early November, that is, before the substantial breach of contract of 20 Yongmei scp003, Henan energy leaders led teams to Beijing and Shanghai for roadshows. A financial institution who participated in Henan energy roadshow in early November recalled to China News Weekly that at that time, the leaders of the other side directly showed us the red head document of 15 billion yuan injected by the provincial government, expressing the hope that we would support the bonds issued by them, and released a series of favorable information to the market.
Some people close to the regulation told the reporter that most of the participants in the bond market are professional investors, so it is impossible to misjudge the companys fundamentals. Stepping on thunder is more because of belief in state-owned enterprises.
Some people close to Henan Energy said that the company had been more confident in repaying 20 permanent coal scp003. When communicating with some creditors on November 12, Henan energy management also said that in order to gather up the principal and interest of 20 Yongmei scp003, there were four plans at that time: one was to issue bonds; the other was to sell equity; the third was to coordinate a fund from the government; and the fourth was to pledge financing after transferring equity. However, none of the four plans was put into effect.
A person from Henan energy and finance business department told reporters, before this default, Pingmei Shenmas equity had not been officially transferred into Henan energy, but at that time, the announcement had been issued. We had been looking for the bank to pledge this equity, hoping to implement this matter before the 10th, but failed to do so in the end.
What really made the creditors feel the change of wind direction was the communication meeting between Henan energy management and some creditors on November 17. Almost at the same time of the meeting in the afternoon of that day, the holders of 20 Yongmei scp003 received the notice from the lead underwriter to communicate about the extension. When asked why the extension was negotiated with financial institutions a week after the default, Henan energy management said, in the early stage, we were also trying to get funds, but the situation has changed. A representative of a financial institution asked, there are only two solutions. One is to get a sum of money from the Henan provincial government to redeem the default bonds, and the other is to communicate with investors to extend the period. Can we understand the change as the scheme tilts towards the latter? The response said that the tilt is not entirely right, they are actively trying to solve the problem, but the focus may be slightly different.
At that time, the holders generally demanded to increase the proportion of principal payment and add additional guarantee. It is necessary to add some guarantees of 3A level state-owned enterprises in the province which are deeply bound up with the government. If there is no such guarantee and the default occurs again in 270 days, there is still no way. Some creditors told reporters, in the future, if you still cant get government support, at least drag a state-owned enterprise in through guarantee. Frankly speaking, thats it.
Since then, the amount of principal payment has increased from zero to 5% and 30%, but it is still difficult to satisfy the creditors. On November 19, only three working days before the cross protection clause was triggered, a Henan energy insider said, the most troublesome thing is that the governments attitude is still unclear.
It was not until the afternoon of November 22 that there was a turnaround. The lead underwriter contacted the holders of 20 Yongmei scp003 urgently, saying that the proportion of principal paid in advance was increased to 50%, and the remaining principal was extended for 270 days, and the default of the current bond was exempted. At the meeting of the holders held on the 23rd, the state owned assets supervision and Administration Commission of Henan Province stated that the previous support plan for Henan energy should continue to be promoted. On the 24th, the proposal was approved by all the holders.
Some holders believe that taking out such a plan means that the province will definitely take a stand, but the actual damage has been caused.
Permanent coal default shock wave
The most direct impact of 20 Yongmei scp003 default is the intensive cancellation or postponement of issuance of urban investment and energy bonds. Within a week from November 10, there were at least 28 bonds cancelled or postponed, with a scale of 22.6 billion yuan. Among them, there were not a few energy bonds, such as 20 Yangquan Coal 02, 20 Shan Coal cp005, 20 Jinneng mtn019 and 20 Yankuang mtn004.
There are also three Henan Provincial Urban Investment and state-owned enterprise bonds to be cancelled, namely 20 Shangqiu 03 of Shangqiu ancient city protection and development company, 20 Kaifeng City transportation mtn001 of Kaifeng City operation investment group, and 20 Henan transportation mtn007 of Henan Communications and Transportation Development Group Co., Ltd., with the issuance scale of 2.6 billion yuan. The chief underwriter of the three cancelled bond issuance told reporters that it was the enterprise that took the initiative to cancel the bond issuance, because it is too sensitive now, and the enterprise itself is afraid of thunder.
However, some people from the asset management department of securities companies disclosed to reporters that after the default of 20 Yongmei scp003, there are still Henan bond projects in inquiry, the work always needs to be done, but the securities companies asset management and self-management basically temporarily stop investing in Henan urban investment and state-owned enterprise bonds in a one size fits all way.
The key is whether there are still conditions to develop business in Henan? Now even yujiaoyun doesnt issue bonds. Originally, their financing cost is relatively low. The coupon rate of a three-year medium term note issued this year is only 2.7%. Faced with the question of whether Henan enterprise bond business will be carried out in the near future, a banking personage told the reporter, we just issued the announcement of Henan enterprises issuing bonds, and immediately a group of peers called and said, this is the time to issue bonds to Henan enterprises? Then we took the initiative to withdraw.
After the default of 20 Yongmei scp003, a number of Yongmei holdings and Henan Nenghua bond investors wrote to the China Association of interbank market dealers, questioning that it was suspected of debt evasion and cancellation, and earnestly requested that the registration and issuance application of state-owned enterprises in Henan Province be suspended, and the recurrence of similar risk events should be carefully prevented and controlled..
Some people close to the financial supervision department of Henan Province told China News Weekly that the impact of Yongcheng Coals default on Henans financial environment is obvious. In fact, in the report made by the Party committee of the state owned assets supervision and Administration Commission of Henan provincial government on October 5, it said, once the debt crisis breaks out in full, it will trigger a chain reaction, which will lead to the rapid deterioration of the financial environment in our province, and even lead to regional financial risks.
The impact of Yongcheng Coals default has spilled over to other provinces. Creditors holding a large number of Shanxi coal enterprise bonds told reporters, Shanxi coal enterprises directly sent us a letter saying, we will certainly not lie down like Yongmei.
The Shanxi government has twice yelled to the market within a week. First, on November 14, Shanxi state owned Capital Operation Co., Ltd. issued a letter to the creditors of Shanxi provincial enterprises, saying that it would give an early warning 15 days in advance and ensure that there will be no default on the due bonds. A few days later, on November 18, at a special meeting held by the Shanxi provincial government for heads of state-owned enterprises and financial institutions, vice governor Wang Yixin directly yelled to financial institutions: financial institutions should have more confidence in Shanxi, and said that in todays background, there is no reason for the provincial state-owned enterprises to default.
The Shanxi government has successively issued the statement that the provincial state-owned enterprises are nearly rigid cashing, which makes many bondholders of Henan energy and Yongmei holdings sigh with emotion, and suggests that the Henan government follow suit. However, some market participants believe that such a statement is more likely to be negative, which will lead to panic among investors.
In the 10 working days grace period after the default of Yongcheng Coal, the creditors expectation for government support has thrown the problem of how the rigid cashing can be broken to the market, and the creditors query on the evasion and cancellation of debt of Yongmei holdings is still in doubt.
The chief economist of Founder Securities said that on the one hand, there are market views that it is a malicious evasion of debt, which requires high-level coordination; on the other hand, credit bonds are risky, and investors should be responsible for their investment behavior. The Yongcheng Coal incident itself is not a complete market behavior, so investors do not bear all market risks, which may need to be coordinated and properly handled at a higher level in the future.
On November 21, the financial stability and Development Commission of the State Council said it would severely punish all kinds of debt evasion and cancellation to protect the legitimate rights and interests of investors. However, cracking down on evasive debt does not mean returning to rigid cashing. As the fixed income analyst of CITIC Securities clearly said, it is proper to gradually break the rigid cashing. However, it is not an excuse for issuers to maliciously evade debts by transferring assets and misappropriating funds, nor is it a shield for intermediaries to provide convenience. Following the self-discipline investigation on Yongmei holdings and Haitong Securities, the association of dealers also launched a self-discipline investigation on intermediary institutions such as industrial bank, Everbright Bank, Zhongyuan bank, Zhongxin international credit rating Co., Ltd., and Xigema Certified Public Accountants (special general partnership) on November 19. Source: China Newsweek Author: Chen Weishan, editor in charge: Wang Xiaowu_ NF
On November 21, the financial stability and Development Commission of the State Council said it would severely punish all kinds of debt evasion and cancellation to protect the legitimate rights and interests of investors. However, cracking down on evasive debt does not mean returning to rigid cashing. As the fixed income analyst of CITIC Securities clearly said, it is proper to gradually break the rigid cashing. However, it is not an excuse for issuers to maliciously evade debts by transferring assets and misappropriating funds, nor is it a shield for intermediaries to provide convenience.
Following the self-discipline investigation on Yongmei holdings and Haitong Securities, the association of dealers also launched a self-discipline investigation on intermediary institutions such as industrial bank, Everbright Bank, Zhongyuan bank, Zhongxin international credit rating Co., Ltd., and Xigema Certified Public Accountants (special general partnership) on November 19.