18th Largest Mill in the World Cannot Repay $29.6 Billion in Debt

Several of Bohai’s creditors are trust companies which are part of the non-bank shadow financing system which takes in funds from retail investors and relends them at high rates.

Investors, worried about the recent debt announcement, have been dumping bonds sold by Bohai Steel in 2014. The steelmaker’s 1.5 billion yuan 2017 Dim Sum notes fell 22 yuan last week to 70 yuan, marking the biggest decline since they were issued.

The company is seeking to roll over its debt, according to a report by Caixin. The city of Tianjin plans to set up a committee of creditors to help the steelmaker. Solutions could include deferment of interest payments and deadline repayment extensions while Bohai Steel restructures.

“We will see more steel manufacturers’ debt defaults this year,” said Lawrence Lu, an analyst in Hong Kong at Standard & Poor’s. “This industry is facing serious overcapacity problems. The government is trying to help the industry but it will take some time for its measures to take effect.”

Analysts believe the plight of Bohai may become a test case for other struggling state-owned enterprises to follow.

“The lack of government support for Bohai Steel’s creditors could lead to greater credit risk pricing for weak companies operating in industries with excess capacity,” said Standard & Poor’s credit analyst Christopher Lee in a report.

In a comment to the South China Morning Post, David Qu, China Rate strategist at ANZ bank, said he favors the use of debt capital markets to address China’s debt portfolio over long term. Direct financing, he said, would enhance transparency in the lending market and promote transferability of loan assets.

Corporate debt is skyrocketing in China with ANZ Bank estimating it at $98.2 trillion in 2015, the equivalent of 145.2 percent of China’s GDP. The steel, coal, cement and non-ferrous metals sectors carry a combined debt of US$1.5 trillion.

Bohai Steel is a state-owned enterprise that merged four state-owned manufacturers in July 2010. The group included Tianjin Pipe Group Corp., Tianjin Iron & Steel Group Co., Ltd., Tianjin Tiantie Metallurgy Group Co., Ltd., and Tianjin Metallurgy Group Co., Ltd. The World Steel Association ranked Bohai as the 18th largest steelmaker in 2014 with production of 18.488 million tonnes. More than 10,000 workers are employed at Bohai Steel.