China’s Bohai Economic Rim Faces $2.1 Billion Default of State-Owned Company

December 4, 2019 Updated: December 4, 2019

News Analysis

China Fortune Global 500 member Tewoo Group is set to default on Dec. 16 if creditors refuse to accept up to 64 percent “haircuts” on its debt. Tewoo will be the first state-owned enterprise (SEO) to default in the U.S. dollar bond market in two decades.

Tewoo began as a state-owned commodity trader for northern China’s Bohai Economic Rim that surrounds Beijing and Tianjin. But its importance swelled to facilitate the regional boom to rival the Pearl River Delta in the south and the Yangtze River Delta in the east.

Five times larger than the next biggest commodity trader, Tewoo dominates China trading in metals, materials, coal, coke, fuel oils, iron ores, nonferrous ores, chemicals, and electrical products. In addition, the company operates ports, mines, logistics, real estate, autos, and financial services.

Due to its international scale, Tewoo was able to sell about $2.1 billion in bonds denominated in U.S. dollars at interest rates of about half the cost of Chinese bond sales.

With $66.6 billion in revenue, the massive enterprise was rated as the 132nd largest company in 2018’s Fortune Global 500 list. Tewoo claims it has $38.3 billion in assets, more than 17,000 employees, and profits of $122 million as of 2017, according to Fortune. It also has a broadening footprint in the United States, Germany, Japan and Singapore.

However, Tewoo has not been rated by Moody’s or S&P Credit Services.

The first indication of distress came during an April cash crunch when Tewoo globally tanked industrial metal market prices by dumping huge amounts of copper ingots; and then seeking lender debt payment extensions.

The much smaller Fitch Ratings slashed the company’s credit score by six notches to a “junk” B- rating in July and pulled coverage due to “weak liquidity and high leverage” after a Tewoo subsidiary missed a bank payment in June and another unit missed a payment on a $234.9 million bond.

Tewoo said last month it was unable to repay interest on a $500 million bond, prompting Industrial & Commercial Bank of China to transfer $7.875 million to bondholders on its behalf, according to a Nov. 26 report by Bloomberg.

When Tianjin municipal-owned Capital Investment and Management (CIM) Company was appointed to manage Tewoo’s off-shore debt last month, creditors were shocked to learn that CIM was unwilling to buy a controlling stake in Tewoo.

Although Tewoo still claims that its shareholder equity is $3.662.7 billion, Wall Street analyst have little understanding of the true financial condition of Tewoo. CIM has allowed the company to miss “dollar bond” payments, and after a 30-day period, Tewoo will be the first SEO to default in the U.S. dollar bond market in two decades on Dec. 16, according to Bloomberg.

CIM’s stated that the Tewoo bondholders’ only alternative is acceptance of an unprecedented restructuring plan that entails forgiveness, known as a “haircut,” of almost $1 billion in face-value and a swap for bonds paying much lower interest rates.

CIM has given Tewoo bondholders until Dec. 10 at the latest to accept the “haircut” exchange offer.

China is suffering a major economic slowdown and its balance of payments is turning negative due to the Sino-U.S. trade war and foreign companies investing in cheaper labor markets, such as Vietnam and Mexico, that offer much lower wages.

The Chinese regime is also finding it difficult to bail out troubled SEOs. The first sign of existential financial distress is coming from the Bohai Region metropolis of greater Beijing—it also has the highest ratio of local government financing vehicle bonds to GDP (gross domestic product) in China. Access to raising new capital to bail out companies has shriveled when Tianjin Binhai New Area Construction & Investment Group Co. postponed plans to sell a three-year “dollar bond” since July.

China just raised $6 billion in its biggest ever “dollar bond” sale early last week and was expected to pioneer a path for over 20 Chinese real estate companies to issue “dollar bonds” worth over $5 billion this month. But electronics giant Tunghsu Optoelectronic Technology missed a bond payment on $266 million in debt late in the week.

Chriss Street is an expert in macroeconomics, technology, and national security. He has served as CEO of several companies and is an active writer with more than 1,500 publications. He also regularly provides strategy lectures to graduate students at top Southern California universities.