(Yicai Global) June 11 – A debt default by Beijing Gold Exchange Center that was exposed last month has spelled trouble for its parent company and debt guarantor China CYTS Industrial Development and has inflicted a blow to its creditors, leading to worries about credit risk exposure in the market.
Although CYTS Industrial Development has submitted an application to several financial institutions for a debt rollover and said that it will repay outstanding debts owed by its unit before July 4, some firms went ahead with their decision to sue the company, an insider told Yicai Global.
"In early to mid-May, we received an application letter from CYTS for a debt rollover and postponement in repayments," a source in a creditor company told Yicai Global.
"CYTS told some creditors that it hoped a debt rollover until July 4, but few of them agreed to the idea," added the source. Several financial institutions have filed a lawsuit to courts and more and more institutions will initiate judicial proceedings.
An insider told the reporter that the loans granted by four trust companies, including a state-owned one and CITIC Trust to Beijing Gold, which specializes in the sales and trading of precious metals and handicrafts, were defaulted on, with the default amount reaching about CNY600 million (USD94 million).
"No official news came out right now and all creditors are concerned. CYTS Industrial Development has yet to offer a specific explanation about repayment plan or disposal scheme," said the source.
The debt default by Beijing Gold Exchange Center was first exposed by CITIC Trust, which revealed in early June that it issued a CNY545 million trust loan to the company on May 4, 2017. According to the original schedule, Beijing Gold should have repaid the principal and the interest on May 4 this year, yet it failed to repay the principal and the interests of CNY10 million, which constituted a material breach of contract.
CYTS Industrial Development failed to repay an advance of Hengfeng Bank in April and the matter was published by the enterprise credit record system. As a result, many other banks no longer lend money to the company despite earlier promises.
In a letter of application for deferred redemption it issued to the creditor institutions, CYTS Industrial said that financial institutions have a tight credit line this year, and that the credit lines that have been previously approved cannot be materialized in a timely manner.
Given the insufficient short-term liquidity and capital chain tension arising from the large initial investment in the projects of the company, and the failed fundraising plan, the firm is unable to raise sufficient funds to repay the due debts on time, CYTS Industrial Development added.
"CYTS Industrial Development carried out a large number of acquisitions previously, and one reason for its default is the lack of a proper funding plan," the source said.
A high incidence of defaults on Chinese domestic bonds since the beginning of this year has broken "the myth of bond redemption."
Since a marked fall in aggregated social financing is very possible in the second half year, and the core of the credit bond problems lies in liquidity, it is necessary to be cautious about possible further spread of default risks, the manager of a publicly-offered fund management company in Shenzhen told Yicai Global.
"Credit bonds will undergo a relatively substantial adjustment and may lead to a noticeable expansion of credit spreads, and such risk may even hit urban investment enterprises," the insider said. "At present, the credit bond market is not faced with the problem of valuation and price, but faces the issue of lack of liquidity, which is difficult to reverse."
Public information shows that one of the shareholders of CYTS Industrial Development is China Youth Travel Service Group directly under the Communist Youth League Central Committee.
The business registration data indicate that a subsidiary of CYTS Industrial Development holds about 67 percent stake in Beijing Gold Trading Center.
Editor: Mevlut Katik