Vulture funds seek to buy bonds from troubled Chinese state-owned companies after a heavy sell-off was triggered by the failure of a large coal mining group on a Rmb 1 billion (US $ 156 million) issue.
Yongcheng Coal & Electricity, a miner in central Henan Province, one of China's most populous provinces with a population of more than 95 million, was behind schedule on Friday. That was just weeks after Brilliance Auto, an automaker for the Liaoning provincial government, announced that it would be unable to repay a three-year Rmb1bn bond.
The failure of the two groups has caused government-backed corporate bond prices to fall as international and onshore investors grappled with the prospect of the Chinese central government stepping down from its traditional role as a safety net for local government companies.
Beijing faces the challenge of managing the stress of state-owned companies, especially those that are controlled by provincial and local governments and that are struggling financially during the Covid-19 pandemic.
"The central government will not allow the situation to deteriorate as it could lead to systemic risks," said David Huang, a Shanghai-based bond fund manager who bought Rmb 20 million for a three-year loan from Brilliance Auto for 20 cents on the market Market spent dollars. "That creates an investment opportunity."
However, other investors viewed the failures as a sign that government bailouts for troubled state-owned companies, which most investors took for granted, could no longer be guaranteed. "Our investment decision was based on the belief that triple-A-rated government companies are safe investments regardless of fundamentals," said the chief rating officer of a Shanghai-based bond fund. "That is no longer the case."
Investors expressed alarm at the defaults, in part because many of the state-owned companies previously had seemingly solid fundamentals. Both Yongcheng and Brilliance received a triple-A rating and, according to their most recent annual accounts, each had more than Rmb 20 billion on their balance sheet.
None of the companies responded to requests for comment.
"What can we still trust if both the rating agencies and the annual financial statements are not credible?" asked the Shanghai fund manager.
Investors were also upset that before the default, Yongcheng and Brilliance spun off profitable assets, including Brilliance's stake in the BMW joint venture.
"This is a bad example of how state-owned companies can be as irresponsible as private companies in avoiding debt payments," said a Yongcheng believer.
Vulture fund managers who specialize in distressed assets told the Financial Times that they had placed "significant" orders for bonds issued by ailing state-owned companies.
Vulture investors still expect regional governments to step in. "If they let Yongcheng or Brilliance go under, no state-owned companies in Henan or Liaoning will ever be able to enter the bond market again," Huang said. "The government will not allow that."