Kaidi Ecological's Default May Affect Debt Holders

Kaidi Ecological's Default May Affect Debt Holders

Zhou Ailin

Date: Wed, 05/09/2018 - 19:31 / source:Yicai
Kaidi Ecological's Default May Affect Debt Holders
Kaidi Ecological's Default May Affect Debt Holders

(Yicai Global) May 9 -- A recent default at clean-energy business platform Kaidi Ecological and Environmental Technology Co. could affect institutions that hold the company's bonds, Yicai Global has learned.

The Wuhan-based firm acknowledges that "As of May 7, 2018, the company has been trying to raise capital for repayment of the principal and interest of the current bond, but failed to raise sufficient funds for the repayment, indicating it has already constituted a material breach of contract," in a document exclusively obtained by Yicai Global from an agency.

The firm failed to pay a CNY698 million (USD109.56 million) bond on May 7. Defaults on bonds have been a growing trend in China this year. Some 19 domestic corporate bonds valued at more than CNY13 billion have defaulted as of May 7, compared to 49 in total last year, Chinese data provider Wind states.

With regard to the follow-up repayment arrangement, the document states that the company will make efforts to raise funds through various channels so as to pay back the principal and interest of the medium-term note as soon as possible, possibly within two months.

Breach of Contract

Kaidi Ecological's medium-term note 11 Kaidi MTN1 materially breached its contract and the company's redemption funds were not in place on May 7 as scheduled, Yicai Global learned from banking sources.

"This breach of contract may be just the beginning," an insider from a fund holding Kaidi bonds told Yicai Global. "The company will probably breach contracts for a number of its follow-up debts and it may experience difficulties to repay the debts within two months."

Following the default, Chinese credit rating agency CCXI downgraded the company's rating from AA to C, and also lowered its debt rating for the 16 Kaidi 03 bond from AA to C.

Kaidi Ecological faces a total debt of CNY23 billion (USD3.6 billion), of which bank loans account for 32 percent, finance leases 17 percent, bonds 14 percent, trusts non-standard debt assets 17 percent, funds (more than five years) 13 percent and asset-backed securities (ABS) 6 percent, Yicai Global learned.

In addition, the company currently has a total of CNY3.4 billion in outstanding bonds, among those due this year are one for CNY658 million due in May, one for CNY800 million in September, one for CNY1.18 billion in November and one for CNY600 million in December.

Debtholders Could Be Affected

Sources from a number of institutions have revealed to Yicai Global that there are a number of bond funds holding Kaidi bonds with large positions. "These bond funds have experienced extreme volatility in net values in recent days. This is very rare for bond funds," the source said.

The main reason for Kaidi Ecological's breach of agreement was that its existing financing methods debt repayment all failed, specifically, it could not continue to issue new debt to repay old ones. In addition, the company did not use its income from projects to repay debts, a source from a fund who participated in the company's debt negotiations told Yicai Global.

Kaidi Ecological recently negotiated with an investment firm with a state background to raise funds but failed, according to people familiar with the matter.

It is unknown how the firm can deal with default bonds, a source from a fund said. "Such bonds are all unsecured credit bonds and currently it seemed that Kaidi Ecological's parent firm has not made any comment on this issue, so it is still difficult to say how to solve the problem and whether investors can get back their principals and interests," he said.

Kaidi Ecological engages in biomass power generation as its main business and also works in the wind and hydropower sectors. The company's rating has remained stable at AA since 2010.

Kaidi Ecological's profit from biomass power plant operations did not meet expectations, Dongxing Securities Co. pointed out in a report published earlier this year.

Underperforming financial results were due to changing policy support, the start of construction work on multiple wind power, solar power, and biomass projects, and problems such as repeated construction, wasted resources and low profitability.

High costs in fuel and labor and a lack of policy support mean almost all biomass projects face losses once they are put into operation, the report said.

Editor: William Clegg

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Keywords: Debt Default, Over Capacity, Low Efficiency, Biomass Power Generation, Kaidi Ecological and Environmental Technology