Friday, June 26, 2015

Shanshui's Technical Default.

Last week, China Shanshui Cement Group Ltd. announced that it could be the next Chinese company to default on its debt obligations. In this case, the cause of the default is corporate governance, not operating health. As Bloomberg explained:
China Tianrui Group Cement Co., which holds a 28.2 percent stake in Shanshui, has proposed to install four people -- including its chairman Li Liufa and Chief Executive Li Heping -- to the cement maker’s board, according to an exchange filing Monday. Tianrui has called for a vote to oust Shanshui chairman Zhang Bin and founder Zhang Caikui, an official said last week. The removal of board members including its chairman would constitute a “change of control” event that requires the company to repurchase its outstanding bonds, Shanshui said in a filing late Friday. It won’t have enough cash to redeem $921 million of its notes, leading to a default, it said.
In this specific case, the chairmanship may not transition, or Tianrui Group could step it to cover the debt if it does. If the company is forced to pay the debt back immediately, the inability to repay the total amount would not be caused by deteriorating cash flows.

Last September, Shanshui Cement was among a group of capital goods industry companies that were downgraded by global ratings agencies. The New York Times reported:
On [September 15, 2014], S&P cut the ratings of China Shanshui Cement and Guangzhou R&F Properties by a notch, plunging them deeper into junk status. Last week, fellow rating agency Moody's downgraded steelmaker China Oriental, already wallowing in non-investment territory, also by a notch.
All of these companies “that had binged on the easy credit springing from a round of government stimulus in 2008-2009.” Considering that Shanshui and Tianrui are both in the same industry, the dynamics that are affecting Shanshui should eventually come around to negatively impact Tianrui, as well. If one company is having difficulty paying off its debt in the long term, then another company in the same industry will most likely have similar difficulties down the road.