Cloud Live Spooks Chinese Junk Bonds Amid Second Onshore Default

http://www.wsj.com/articles/chinese-defaults-head-into-the-cloud-heard-on-the-street-1428409016

http://www.bloomberg.com/news/articles/2015-04-07/cloud-live-spooks-chinese-junk-bonds-amid-second-onshore-default

http://www.bloomberg.com/news/articles/2015-04-06/china-gets-2nd-onshore-default-as-cloud-live-date-missed

Cloud Live Spooks Chinese Junk Bonds Amid Second Onshore Default

April 7, 2015

Chinese junk bonds fell after Cloud Live Technology Group Co. said it will miss payments due today as the nation braces for its second onshore corporate default. The yield on solar-cell maker Baoding Tianwei Baobian Electric Co.’s notes due 2018 climbed seven basis points to 7.49 percent after Cloud Live’s statement late Monday, according to exchange data. Fertilizer company Inner Mongolia Nailun Group Inc.’s 2018 bonds surged 50 basis points to 21.06 percent. Higher-graded securities showed little reaction.“The default will probably have an impact on lower-rated bonds sold by privately owned companies,” said Yang Feng, a fixed-income analyst in Beijing at Citic Securities Co., the nation’s biggest brokerage. “The market has mostly expected it.”

President Xi Jinping’s anti-graft probe and the slowest economic growth since 1990 are stoking default concerns a year after Shanghai Chaori Solar Energy Science & Technology Co. became the first company to default on onshore bonds. Companies in Asia’s largest economy need to repay 1.5 trillion yuan ($242 billion) of local-currency notes in the period to June 30, the most for a quarter in Bloomberg data going back to 1998.

Cloud Live, the Beijing-based big data provider, which shifted into that industry in July after corruption probes hurt its former restaurant business, will fail to meet an April 7 deadline to pay investors who had exercised an option to sell back notes, the company said in statements to the Shenzhen stock exchange on Monday. Failure to pay would constitute the second default on an onshore yuan debenture.

Yields Soar

Cloud Live issued the bonds in question in 2012 with a 6.78 percent coupon. The yield on the securities jumped over 18 percent as of April 1 from 8.9 percent on Dec. 31, exchange data show, before trading was suspended from April 2. Investors had an option to sell them back to the company April 5, with the effective payment deadline being April 7, the first business day after holidays on April 5-6.

Cloud Live said on Monday it still lacks 240.6 million yuan needed to make note and interest payments due April 7 after raising 161.4 million yuan. Pengyuan Credit Rating Co. cut the company’s rating from BB to CC, according to the company’s exchange statement on April 3.

Pengyuan also said that Inner Mongolian Nailun owed overdue interest on a loan in a Feb. 9 report. It has to repay 540 million yuan of principal and interest on May 2015 bonds on May 20 and has an interest payment due on a separate note on May 5, Chinalin Securities said March 12.

Inner Mongolian Nailun’s and Baoding Tianwei Baobian Electric’s 2018 bonds are locally graded at A+. Chinese corporate bonds rated AA- or lower are considered as junk bonds, according to Haitong Securities Co.

Principal Default

Haitong Securities and China International Capital Corp. said April 2 in reports that Cloud Live would be the first default on a bond principal payment. Shanghai Chaori failed to fully pay interest on its bond last year. Premier Li said on March 15 the government will prevent any systematic fallout while tolerating individual cases of financial risk.

Cloud Live’s shares rose 8.6 percent to 8.30 yuan per share as of 11:30 a.m. in Shanghai.

This isn’t the first time efforts to clean up the world’s second-biggest economy have touched the company. Cloud Live was formerly Beijing Xiangeqing Co., which operated a chain of restaurants. It said in July it was shifting into the Internet business and changed its name in August.

The company’s abrupt turn into the “totally unrelated” information-technology industry came after it shuttered some stores in 2013, according to a documentary on Xi’s anti-graft drive that aired on the official China Central Television on Dec. 17.

Chinese Defaults Head Into the Cloud

AARON BACK

April 7, 2015 8:16 a.m. ET

China’s experiment with credit risk just went live.

Until now, defaults in China’s domestic bond market have been virtually unheard of. But on Tuesday, struggling restaurateur-turned-technology startup Cloud Live Technology became the first company to miss a principal payment.

Last year, Shanghai Chaori Solar Energy missed interest payments, making it technically the first domestic default. But its bondholders were eventually paid the missing interest in a convoluted, government-arranged bailout.

Now Cloud Live says it doesn’t have the funds to repay 400 million yuan ($65.2 million) in debt it raised three years ago. It is possible that bondholders could be made whole down the line in another Chaori-style deal. But if not, Cloud Live will be China’s first outright bond default.

That would be welcome. Shielding bondholders from default risk distorts capital allocation by freeing investors from having to gauge creditworthiness. If China is to achieve its stated goal of giving the market the primary role in allocating resources, credit markets must become acquainted with the notion of risk.

If there was ever a time to stand by and allow a default, Cloud Live would be it. Formerly known as Beijing Xiangeqing Group, the company was a spicy Hunan-style restaurant chain popular with government officials. But its business turned south due to new rules discouraging lavish meals by public servants.

The company then changed its name to Cloud Live, announced plans to expand into big data and cloud computing, and sold its restaurants. Its former chairman Meng Kai, meanwhile, has been under investigation since December. In a statement with the Shenzhen Stock Exchange on Tuesday, Cloud Live said Mr. Meng left China for a holiday in October and hasn’t returned.

Given the novelty of default events in China, markets may respond in hard-to-predict ways. Cloud Live’s Shenzhen-listed shares, for instance, soared nearly 10% on Tuesday before being halted ahead of the default announcement.

Cloud Live’s case could be unique enough that the broader bond market escapes mostly unscathed. But tougher tests lie ahead. Beijing is currently conducting an audit of all debt linked to local governments, in which some debt raised by off-balance-sheet platforms known as local government financing vehicles is to be clearly classified as not backed by state guarantees.

If and when these government-affiliated borrowers start defaulting, China’s credit markets will get a real jolt.

Cloud Live Says Will Miss Payment in 2nd China Onshore Default

April 6, 2015

China’s corporate bond market may experience its second default after Internet company Cloud Live Technology Group Co. said it will miss payments, and Premier Li Keqiang said the nation will tolerate individual cases of financial risk.

The big data provider, which shifted into that industry in July after corruption probes hurt its former restaurant business, will fail to meet an April 7 deadline to pay investors who had exercised an option to sell back notes, the company said in statements to the Shenzhen stock exchange on Monday. Failure to pay would constitute the second default on an onshore yuan debenture.

President Xi Jinping’s anti-graft probe and the slowest economic growth since 1990 are stoking concern defaults may spread, a year after Chaori Solar Energy Science & Technology Co. became the first company to default on onshore bonds. The China Securities Regulatory Commission had said last month that Cloud Live should urge its biggest shareholder and former chief to return from overseas to solve the repayment problem.

Cloud Live issued the bonds in question in 2012 with a 6.78 percent coupon. The yield on the securities jumped over 20 percent as of April 1 from 9.7 percent on Dec. 31, exchange data show. Investors had an option to sell them back to the company April 5, with the effective payment deadline being April 7, the first business day after holidays April 5-6.

Principal Default

Haitong Securities Co. and China International Capital Corp said April 2 in reports it would be the first default on a bond principal payment. Shanghai Chaori failed to fully pay interest on its bond last year.

Premier Li said on March 15 the government will prevent any systematic fallout while tolerating individual cases of financial risk.

This isn’t the first time efforts to clean up the world’s second-biggest economy have touched the company. Cloud Live was formerly Beijing Xiangeqing Co., which operated a chain of restaurants. It said in July it was shifting into the Internet business and changed its name in August.

The company’s abrupt turn into the “totally unrelated” information-technology industry came after it shuttered some stores in 2013, according to a documentary on Xi’s anti-graft drive that aired on the official China Central Television on Dec. 17.

Anti-Corruption Barometer

The business performance of “high-end restaurants like Xiangeqing has become the barometer” for the anti-corruption drive which has discouraged wining and dining, the documentary said. Many of its restaurants in Beijing were located near government agencies or military compounds.

The CSRC told Cloud Live on Dec. 26 it would start investigating its then-chairman Meng Kai for violating securities regulations, according to a Dec. 29 company statement that didn’t give further details. Cloud Live said in a Jan. 7 statement that Meng had resigned as chairman and president on Jan. 5, in order to protect company and investor interests.

Cloud Live was told by the CSRC in October that the company itself would be investigated for violation of securities rules. The probe hasn’t produced any results, according to a Feb. 27 statement.

The firm is among 18 companies the CSRC is investigating, along with their staff, for alleged stock-market manipulation, the regulator said in a Dec. 19 statement. The probe is looking into practices including driving up stock prices by quickly buying and selling and selectively releasing information to move the market, it said.

Cloud Live’s Meng went abroad after the nation’s Golden Week holiday in the first week of October to raise money for note repayment and look for potential buyers for company assets, according to a Dec. 2 company filing. It didn’t say where he had gone, and there has been no update on his whereabouts.

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