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Sinosteel bond investors hope for bailout as default looms

Excerpts:

A major Chinese state-owned miner and steel trader is poised to default on its bonds this week, the latest test of whether Beijing is willing to impose market discipline on national champion companies.

Sinosteel, one of an elite club of 112 state groups directly owned by the central government, sent a letter to investors last week warning that its subsidiary lacked the funds to repay principal and interest on Rmb2bn ($315m) in bonds sold in 2010 due on Tuesday.

“The company’s business has stagnated and cash flow has dried up at headquarters and a portion of subsidiary enterprises,” said the letter, a copy of which circulated on social media on Friday. Sinosteel was not available for comment.

Sinosteel imports iron ore for many of the country’s steel mills. It originated as a simple trading company but expanded aggressively in recent years, buying into both domestic steel mills and mining projects from Africa to Australia

China’s leadership is reluctant to tolerate public defaults due to fears about financial instability. Sinosteel investors are hoping that the government or another state entity will step in with a last-minute bailout. Last month state-owned heavy machinery producer China National Erzhong Group narrowly averted default when its parent company said it would buy outstanding bonds from investors.