Chinese Chipmaker’s $2.5 Billion Crisis Shows Growing Risks

(Bloomberg) -- A top Chinese chipmaker’s deepening bond crisis is sending a fresh signal that Beijing is willing to let ailing state-linked firms fail in order to instill stronger financial discipline into a recovering economy.

Tsinghua Unigroup Co. said it won’t be able to repay the principal on a $450 million dollar bond due Thursday, which would trigger cross defaults on a further $2 billion of debt. This would be the company’s first dollar bond repayment failure and came after it defaulted on a 1.3 billion yuan ($199 million) local bond last month.

The chipmaker’s latest bond blowup adds to a wave of defaults in China’s state sector, including those from Yongcheng Coal & Electricity Holding Group Co. and Brilliance Auto Group Holdings Co., that rocked the country’s credit market in recent weeks. High-profile state-backed firms such as Peking University Founder Group Corp., Tewoo Group Co. and Qinghai Provincial Investment Group Co. also have suffered repayment failures and entered court-led restructuring in the past year.

Beijing has long vowed to let its weaker state-run enterprises, known as “zombie” firms, fail and use defaults and bankruptcies to resolve their debt problems, as part of a broader campaign to reinforce market discipline and boost economic efficiencies. The latest string of bond upsets suggests policymakers are refocusing on the effort now that the world’s No. 2 economy has decidedly come out of a pandemic-induced slump.

“We should see rising refinancing and repricing risk for weaker state-linked firms, which will lead to a rising default rate,” said Andrew Chan, an analyst for Bloomberg Intelligence. “Bailouts are unlikely, in our view, as China aims to restructure, consolidate and eliminate zombie-like state-linked firms unless it leads to systemic risk.”

Unigroup’s three other bonds to be affected by the cross defaults are a $1.05 billion note due 2021, a $750 million bond due 2023 and a $200 million bond due 2028, the company said in a filing to the Hong Kong stock exchange late Wednesday.

Its dollar bond due 2023 fell nearly 2.5 cents on the dollar to 22.5 cents as of 11:42 a.m. Hong Kong time, the biggest drop since Nov. 12. Its 2021 dollar note slid 1.7 cents to 28.2 cents, the most since Nov. 30.

The chipamker earlier warned it may also fail to repay the interest on a 5 billion yuan bond due Thursday. The company’s finances have deteriorated sharply in the last three years after embarking on a borrowing spree to fund takeovers and other investments intended to boost its position in the chip industry.

Founded in 1988, Tsinghua Unigroup is a business arm of Tsinghua University, the country’s top tertiary institution that counts President Xi Jinping as an alumnus. The company’s net loss widened to 3.38 billion yuan in the first half this year from 3.2 billion yuan a year ago, according to the firm’s latest interim financial report.

“The next default event to watch out for could be its parent company Tsinghua Holdings, but their bonds are already trading at distressed levels so it’s being priced in,” Chan said. “This event will prompt rising concern about onshore stress spilling over into the offshore market.”

On Monday, a company official said during a meeting with creditors that a working group led by government officials and parent Tsinghua Holdings Corp. were drawing up proposals for resolving its debt problems, people familar with the matter said. They added the official said there’s hope that a detailed plan will emerge in the near term, with the likelihood of bringing in new funds or investors.

©2020 Bloomberg L.P.