A factory of Shanshui Cement is seen in Liaocheng, China. The cement firm said it has decided to apply for provisional liquidation after determining that it will default on onshore debt payments.

Reuters
Hong Kong

China Shanshui Cement warned investors it will default on more than $300mn of onshore debt payments due and will seek to appoint liquidators, a sign Chinese authorities are more willing to let weak firms fail.
The privately controlled company, with a market capitalisation of $2.7bn, has felt the squeeze from falling demand in a sector struggling with overcapacity as the giant economy shifts gears.
It reported a 31% decline in revenues and a net loss for the first half of the year. At that time, long-term borrowings were over 8bn yuan ($1.25bn).
Chinese authorities are keen for markets to price credit risk more accurately, in part to provide a check on industrial overcapacity, and so are likely to increasingly distinguish between stronger firms and weaker ones, analysts said.
“It’s a sign that bailouts are not for everybody and that the slowing economy is taking its toll on the non-investment grade sector,” said Warut Promboon, chief rating officer at Dagong Global Credit Rating.
“The strong names will get the benefit of cheap funding because the central bank will keep monetary conditions easy while the riskier credits will have a hard time refinancing because of weakening metrics,” Promboon said.
Chinese markets have operated for years under the assumption that most bonds are state guaranteed, highlighting the difficulty of pricing risk in the country.
The first public default, by Chaori Solar, was only in 2014 and since then there has been a trickle of missed debt payments as companies were left to defend for themselves. It was only in April this year that Baoding Tianwei Baobian Electric Co became the first state-owned firm allowed to default.
Shanshui’s board said in a stock exchange filing it had concluded that it would be unable to repay holders of a bond, so had decided to petition to wind-up the company.
The 2bn yuan bond was issued by its fully-owned subsidiary Shandong Shanshui.
The default would trigger an accelerated repayment clause on its $500mn in dollar bonds due 2020, and so constitute a default event on those bonds as well, it said.
Those bonds, trading around 80 cents on the dollar on Tuesday, plunged to 45 cents on Wednesday after the announcement, before recovering to trade around 65 cents.
The company also has $28mn in outstanding bonds due in 2016, Reuters calculations show. The company’s shares have been suspended since April.
“The call of the hour is for the cement sector to have meaningful consolidation. It suffers from overcapacity and environmental issues, increasing the pressure on players to weed out competition in order to gain economies of scale and sustain market share,” said Nancy Koh, a DBS credit analyst in Singapore.
Shanshui’s situation has been complicated by a fight for management control, which analysts said had unnerved lenders.
Privately owned Tianrui Group, which owns a 28.61% stake in Shanshui, failed earlier this year in attempts to remove most directors of the company. Tianrui’s latest proposal to remove directors is due to be heard at an extraordinary general meeting on November25.
Two other major shareholders, China National Building Material holding 16.67% of the company and Asia Cement Corp which owns 20.96%, have an outstanding buy-out offer. The terms have not been made public.