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China's Dandong Port Group Defaults on $150 Million in Bonds

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10/31/2017 | 01:51pm CET
By Chao Deng in Beijing and James T. Areddy in Shanghai 

BEIJING -- A debt-laden port management company in northeast China defaulted on $150 million in bonds, as highly leveraged businesses get squeezed by Beijing's campaign to weed out risks in the financial system.

Dandong Port Group Co., controlled by a Chinese construction magnate with political ties in the U.S., told bondholders this week that it is unable to repay part of 1 billion yuan in bonds due Monday. A company statement cited "heavy interest-bearing debt burdens and high short-term payment pressure" and said it is working with underwriters to repay the investors.

The port, located at the mouth of the Yalu River on the border with North Korea, has expanded energetically in recent years to handle soybean imports from the U.S. and coal from Mongolia, even as much of northeast China's resource-heavy economy struggled. International sanctions on North Korea have pinched some trade, though a company representative said the port halted business with the country in 2010 and so hasn't been affected by the restrictions.

Dandong Port's default is one of the largest this year. News of it fell on markets that were showing fresh volatility after weeks of relative calm engineered by Beijing ahead of a pivotal Communist Party congress that concluded last week. Share prices in Shanghai fell sharply Monday and only recovered partially by Tuesday.

"The real market is slowly coming out, after the congress," said Shen Meng, director at Beijing-based investment bank Chanson & Co. "Dandong Group's problems reflect the lackluster state of the whole Chinese economy and the northeast region."

Defaults, still rare in China, are expected to increase following that congress, which handed President Xi Jinping a second five-year term and endorsed his broad program to make China a rich world power. To do that, Mr. Xi emphasized that the government will sustain a push begun this year to reduce high levels of debt that might pose a risk to the financial system.

Money is increasingly tight for Chinese companies as banks respond to government calls to more closely scrutinize borrower business plans and authorities crack down on riskier financing plays. Yields on triple-A rated five-year corporate bonds are at nearly 5%, compared with 3.9% at the beginning of the year.

Chinese firms have defaulted on 35 bond payments this year, compared with 78 last year and 23 in 2015, according to data from Shanghai Wind Information Co.

While the downturn is in part due to a rebound in coal and steel prices that buoyed the bottom lines of some companies, analysts have said that Beijing has also shown wavering tolerance for defaults, preferring instead to orchestrate rescues. It has encouraged companies shackled by debt to offer equity to banks and other creditors in exchange.

Asked if authorities would step in to help, a Dandong Port representative said "we've always worked with the local government" and declined to give details.

Dandong Port's 1 billion yuan in bonds, issued in 2014, carried a coupon rate of 5.86% in annualized interest. Though the company made the 58.6 million yuan in interest due Monday, it couldn't meet payment of principal on the bonds, whose investors exercised an option to sell them to the company early.

Dandong's profits have been sliding, and the firm warned about debt risks last year. The company has more than 40 billion yuan in unpaid debt, including several billion yuan in bonds, according to its half-year statement issued in August. It had a 76% debt-to-asset ratio as of last year.

The company's controlling shareholder, Wang Wenliang, was replaced as Dandong Port's legal representative this August, although he remains in control of Dandong Port through two corporate entities, one of which is based in Hong Kong, according to company filings.

A fixture on lists of China's wealthiest people, Mr. Wang has surfaced in separate scandals in China and the U.S. in recent years. He was one of several dozen deputies from Liaoning province expelled from China's legislative body last year in a vote-buying scandal.

In the U.S., his political funding and other donations have also been scrutinized. His construction business Rilin Enterprises, for instance, gave $1 million to $5 million to the Clinton Foundation since its founding, according to records published by the organization co-founded by the former candidate Hillary Clinton. A spokeswoman for Mr. Wang put his total donations to the foundation around $2 million.

Also last year, The Wall Street Journal reported the Federal Bureau of Investigation had also examined a $120,000 donation by a U.S. business owned by Mr. Wang to then-Virginia Gov. Terry McAuliffe. Mr. Wang has also donated to U.S. universities including Harvard and at least one think tank, the Center for Strategic and International Studies.

There is no sign that any of the donations was illegal. Spokesmen for the recipients and for Mr. Wang have pointed out that he has significant business in the U.S.

--Liyan Qi and Grace Zhu contributed to this article.

Write to Chao Deng at [email protected] and James T. Areddy at [email protected]

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