Hohhot Financing Vehicle Narrowly Avoids Bond Default

One day after a state-owned infrastructure company in the northern Chinese city of Hohhot failed to repay a 1 billion yuan ($142.1 million) bond, bondholders received partial payment under an agreement with the borrower, narrowly avoiding another default by a Chinese local government financing vehicle (LGFV).

Smaller bondholders received full payment from the issuer, Hohhot Economic and Technological Development Zone Investment Development Group Co. Ltd., which is wholly owned by the financial and audit bureau of the Inner Mongolia capital city’s special economic zone, while big holders received partial payment, a person close to the matter told Caixin.

The biggest bondholder, Tianfeng Securities Co. Ltd., received about half of the amount due Monday night, the person said. Tianfeng Securities is also one of the underwriters of the bonds.

Inner Mongolia is a less-developed inland region where local governments in recent years have struggled to replenish their coffers amid the ongoing economic slowdown. The government of the autonomous region has also been rocked by a series of corruption cases, which contributed to the near-default, according to a researcher who tracks Inner Mongolia’s LGFV bonds.

Leadership turmoil in the Hohhot Economic & Technological Development Zone caused a capital shortage in the companies owned by the economic zone, the researcher said.

A spokesman from the Hohhot development zone confirmed with Caixin that the borrower reached a rollover agreement with some bondholders and the remaining balance will be paid off in three months.

The resolution came after the company missed a Friday deadline for early repayment of the bond, catching investors off guard because they usually consider debt issued by LGFVs to be safe investments with government-guaranteed payments.

The note, issued in December 2016, carries an annual coupon rate of 6.8% and allows investors to exercise a put option three years after issuance, meaning holders have the right to force the issuer to repay the principal before maturity. A month earlier, the issuer tried to persuade investors not to exercise the put option because of a capital shortage, according to some reports.

A person close to Tianfeng told Caixin that the brokerage hosted a meeting with other bondholders before the due date. As the main underwriter and biggest holder, Tianfeng didn’t want a default and smaller holders wanted a full exit, so negotiations stalled until the due date, the person said.

At the time, the Hohhot company had only 500 million yuan in its accounts, so it let bondholders negotiate among themselves, the person said.

Since the company rolled over the bond instead of canceling the put option, the bond is still listed in “default” status in the Shanghai Clearing House’s system. But that doesn’t matter now because of the rollover agreement with bondholders, an investment manager at a brokerage told Caixin.

Even though the default crisis seems to be resolved for now, it has already caused ripple effects in the bond market. Another LGFV bond from a different issuer in the Inner Mongolia autonomous region, the Hohhot Chunhua Water Development Group Co. Ltd., sold off Monday.

The Communist Party chief of Hohhot was placed under investigation in June on suspicion of corruption. In August, Xing Yun, former vice chairman of the Standing Committee of the People's Congress of Inner Mongolia, pleaded guilty to accepting bribes worth 449 million yuan ($64 million), a record sum for a provincial-level official caught up in China’s sweeping anti-graft campaign since late 2012.

In the most recent case, Li Jianping, a senior Communist Party member of the Hohhot Economic & Technological Development Zone, was put under investigation in September for serious violation of laws and rules.

Contact reporter Denise Jia (huijuanjia@caixin.com)

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