Bonds Sep 15

Huayang Group's spectacular 'ring of debt'

More than two dozen banks and financial institutions have sued the developer of the notorious Fushun 'ghost city' for defaulting on at least seven bonds and accumulating total debts of about $3.72 billion

Huayang Group's spectacular 'ring of debt'
An aerial view of a gigantic steel ring in the notorious Fushun 'ghost city' in northeastern China's Liaoning province, as it was in May 2017. The structure stands 515 foot tall and was made with 3,000 tonnes of steel. It is now a sad symbol of the dreadful excess and inefficiency of China's rampant and utterly chaotic development. Pic: Yang Yang / ImagineChina.

(ATF) The Bank of Fushun has sued China Huayang Economic and Trade Group Co Ltd – Huayang Group – to publicise its outstanding debt and bond defaults.

Al Jazeera recently published a video on the ‘Fushun Ghost City’ to illustrate China's spectacular economic problems and inefficiencies.

According to reports from China Business Daily, China Finance and China Economic Net, as of now, the company has defaulted on seven bonds. Wind data shows that the balance of the seven bonds totals more than 6 billion yuan (US$886 million). 

The last time Huayang Group disclosed its financial report was the third quarter of 2019. It showed that as of September 30, 2019, Huayang Group had a total debt of 25.17 billion yuan (about $3.72 billion). According to the incomplete statistics from Tianyan, some 15 banks and 11 other financial institutions have had disputes with the group this year.

Seven bonds in default

Specifically, according to Fushun Bank’s complaint, on February 2, 2018, the bank commissioned the “18 Huayang Economic and Trade SCP001” bond issued by Huayang Group for 50 million yuan. The short-term bond was issued on that date and ended on October 30, 2018.

The bond eventually became overdue. Huayang Group issued an announcement saying the firm’s liquidity was insufficient due to bank borrowing and suspended loans. As of October 30, 2018, Huayang Group had failed to raise the full amount of funds to redeem the "18 Huayang Economic and Trade SCP001" bond, as agreed, with the firm failing to repay the principal and interest in full on time. This was a substantial breach of contract.

Fushun Bank alleged that as of January 6, 2019, Huayang Group had to pay 50 million yuan in unpaid principal, and requested the court to order Huayang Group and others to jointly pay. The principal and interest of the bonds were not redeemed on schedule – a debt totalling 54.23 million yuan (including penalty interest of 4.23 million yuan).

After Huayang Group filed an objection, the case was transferred to Beijing No. 2 Intermediate People's Court for trial. But news reports said the bank did not want to comment on this matter.

According to Huayang Group's website, the company has been directly under the China Council for the Promotion of International Trade since 1993 and was elected as the vice-chairman unit of the China International Chamber of Commerce many times. It set up a joint venture in Dalian, China's largest industrial chemical manufacturer – Huayang Ensai Company. But Tianyan data checks show that the company has been listed by the court as a restricted entity more than 20 times.

From the perspective of the bond situation, a number of Huayang Group's lead bond underwriters have made announcements since August explaining the handling of the group's bond defaults. An announcement this month involved a total of seven default bonds: 18 Huayang Economic and Trade SCP003, 18 Huayang Economic and Trade SCP002, 18 Huayang Economic and Trade SCP001, 18 Huayang Economic and Trade CP002, and 18 Huayang Economic and Trade CP001, 15 Huayang Economic and Trade MTN001, and 14 Huayang Economic and Trade MTN001.

According to statistics from Wind, Huayang Group’s current bond debt totals 9.433 billion yuan, including 6.42 billion from the seven defaulted bonds. But the group also has four outstanding unpaid bonds: 17 Huayang 02, 17 Huayang 01, 16 Huayang 01 and 17 Huayang 04. The balance of these bonds was 3.01 billion yuan.

26 banks, institutions in legal quagmire

United Credit Ratings Co Ltd released this year's Tracking Rating for the main body of China Huayang Group and related bonds. It said that "as of April 30, 2020, the company's 2019 annual report and the financial statements for the first quarter of 2020 were not disclosed on schedule."

Huayang Group claimed the delays were due to the coronavirus epidemic and that audit site work could not be carried out as originally planned. The annual report and quarterly report may not be disclosed till the end of this month (Sept 2020). Taking into account the above factors, United Ratings maintained the company's long-term credit rating as "C" grade.

Huayang Group's report for the third quarter of 2019 showed that the company's total assets were 32.809 billion yuan, while total liabilities were 25.169 billion yuan. The rating report said that the company's announcement concerning major litigation in 2019 showed that due to insufficient liquidity, multiple banks filed lawsuits against the firm. The case involved transaction disputes, disputes over contractual guarantees, financial loan disputes, and disputes over letters of credit that have been issued.

‘Untrustworthy’

In 2019, the Beijing Supervision Bureau of the China Securities Regulatory Commission imposed penalties on Huayang Group, indicating that it had "many problems": the company did not actively cooperate with on-site inspections and failed to provide timely and complete financial and accounting information as required. The firm also did not disclose transaction disputes with multiple banks; nor did it disclose major issues such as disputes with the China Development Bank on a financial loan contract.

According to incomplete statistics from reports, this year some 26 financial institutions have had legal disputes with Huayang Group – 15 banks, four securities institutions, two fund companies, two asset management companies, a commercial factoring company, a financial leasing company, and a trust. The banks include one state-owned institution, three joint-stock banks, six city commercial banks, two rural commercial banks, two foreign banks, and a private bank.

A judgment published this year showed that Guangdong Shunde Rural Commercial Bank applied to Beijing No. 3 Intermediate People's Court for "compulsory execution" of a debt of 62.468 million yuan and interest that Huayang Group owed. The court filed that matter on April 1, 2020.

But during the execution process, after the court's verification, the person subject to the order had no bank deposits, no real estate, no vehicle registration, and no foreign investment under the name of Huayang Group. The court concluded the unnamed person was "untrustworthy".

Coronavirus

A spokesperson for the company explained to reporters that the company was not officially going to work due to the impact of the epidemic and could not officially reply.

It is worth noting that the financial sector an important area of activity for Huayang Group. Its website shows that the company has formed a development model with "energy as the leader, industry as the foundation, and finance as the platform".

In fact, Huayang Group has invested in three banks, as well as the establishment of Jintong HSBC Financial Leasing Co Ltd, and many fund companies.

Footage in the 101 East report aired by Al Jazeera shows Fushun City looking nearly empty and abandoned. But the most troubling aspect is that the Fushun City debacle is just one of many 'ghost cities' in China, which suggests there is something seriously wrong about the system that allows these huge projects to flourish and then collapse.