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China State-Run Defaulter Faces Investor Bond Plan Pushback

Bloomberg News

(Bloomberg) -- A state-owned Chinese aluminum producer’s proposal to settle $850 million of defaulted bonds is meeting strong resistance from investors, throwing in doubt a restructuring plan that entails steep losses for bondholders.

On Friday, offshore creditors of Qinghai Provincial Investment Group Co. published a letter to Chinese government entities including top regulators in a Hong Kong newspaper, calling on the defaulter to withdraw its offer of a debt overhaul. The move comes a week after a call with bondholders was cut short when some of them lost their temper over the debt plan.

The bondholder showdown comes just days ahead of the company’s proposal that will expire at 4pm, London time, Feb. 17. Qinghai Provincial offered earlier this month to let holders sell the defaulted notes at discounts as deep as 63%. How receptive investors are to the plan is another test case of their bargaining power when faced with politically influential state-backed borrowers.

“It is possible that their actions may have an impact on the result of the tender offer as they are drawing wider attention from regulators and the public,” said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group.

Read: Qinghai Provincial 2021 USD Holders Consider Bond Acceleration

Last month, the aluminum maker became the second major Chinese government-owned firm to fail on dollar bonds in less than two months, signaling growing stress in the state sector as the economy weakens. Calls to Qinghai Provincial’s financing department went unanswered.

Complaint Letter

In the letter published in the Hong Kong Economic Journal, the creditors alleged that Qinghai Provincial’s offer is a way for state-owned firms to exploit their fortunes, an act they said is tolerated by China’s state asset regulator. They also called for a probe into the aluminum maker’s default and debt restructuring.

The letter is addressed to officials at Chinese government agencies including the country’s economic planning agency and state asset regulator.

Some bondholders are also considering demanding immediate repayment of three dollar bonds, a practice known as an “acceleration,” a starting point for the legal process, according to people familiar with the matter.

The investors’ response is crucial as Beijing appears to be developing a formula for resolving offshore bond failures by state-owned enterprises, after Qinghai Provincial and a major commodities trader proposed nearly identical losses on holders of their defaulted bonds.

Read more: China Suffers Biggest State Firm Dollar Bond Default in 20 Years

The aluminum producer’s offer resembles a key element in the debt restructuring plan of Tianjin-based Tewoo Group Co., which in December became the largest offshore bond defaulter among state-run companies in two decades.

“The cases of Qinghai Provincial and Tewoo raise doubt over SOEs’ willingness to pay and this could get out of control if more Chinese SOEs follow their template,” said Gallimore.

(Updates with some bondholders considering bond acceleration in eighth paragraph.)

To contact Bloomberg News staff for this story: Ina Zhou in Hong Kong at hzhou179@bloomberg.net;Tongjian Dong in Shanghai at tdong28@bloomberg.net;Moxy Ying in Hong Kong at yying13@bloomberg.net

To contact the editors responsible for this story: Chan Tien Hin at thchan@bloomberg.net, Shen Hong

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