Easy access to cheap sources of debt funding no matter how a business is faring may be coming to an end for China’s state-owned companies, now that one has defaulted in that country’s bond market.
Power equipment manufacturer Baoding Tianwei, which is controlled by one of China’s biggest military contractors, Tuesday said it had missed a deadline to pay roughly $14 million in interest due on bonds worth 1.5 billion renminbi, or $242 million, the New York Times reported.
“With the company’s huge losses in 2014 and a sharp rise in the ratio of our debts to assets, we lost financing capacity, and new funding has dried up,” the company reportedly said in a statement. “Despite great efforts on many fronts, we still haven’t been able to raise funds to meet our interest payments.”
The first-ever default of a state-owned company in China might enable the Communist Party leadership in Beijing to finally enact financial reforms to give market forces a greater role, the NYT wrote.
“I think it’s probably just the beginning,” Ying Wang, a senior director of corporate ratings at Fitch Ratings in Shanghai, told the newspaper. “It makes sense for more commercially unviable, inefficiently run state-owned enterprises to default, because otherwise capital can never be allocated efficiently among state and private enterprises. And that runs against the government’s reform agenda.”
But while China recently revamped its bankruptcy laws, it’s unclear whether the courts will be able to help Baoding Tianwei’s bondholders get their money back, she added, because the orderliness of the corporate restructuring process is still in question.