China Corporate Bond Market Likely to See First Default; Shanghai Chaori Solar Unable to Repay All Interest Due on a Bond Friday

China Corporate Bond Market Likely to See First Default

Shanghai Chaori Solar Unable to Repay All Interest Due on a Bond Friday

LINGLING WEI and WAYNE MA

Updated March 4, 2014 7:02 p.m. ET

BEIJING—A Chinese solar company said it won’t be able to repay investors all the interest due on a bond Friday in what may be the first ever default in China’s $1.5 trillion publicly traded corporate bond market.

Shanghai Chaori Solar Energy Science & Technology Co. 002506.SZ +3.19% Ltd, which makes solar cells and panels, announced late Tuesday that it won’t be able to repay about 89.8 million yuan ($14.6 million) interest on a 1 billion yuan bond issued two years ago.

The company is scheduled to make the interest payment on Friday.

“Due to various uncontrollable factors, until now the company has only raised 4 million yuan to pay the interest,” Shanghai Chaori said in the statement, without further elaborating.

So far, China’s governments and state-owned banks have largely kept risky borrowers afloat by providing bailouts or debt extensions. Chinese officials are worried that defaults could lead to rising borrowing costs for some companies already struggling with debt repayment.

Analysts have said that the absence of actual defaults is leading to more risky lending practices and could cause more wasteful investments in industries that have already suffered overcapacity.

In a high-profile case last month, a coal company facing repayment of a 3 billion yuan high-interest loan was bailed out with the assistance of a local government, averting what could have been the first major default in the rapidly-growing but poorly-regulated shadow banking sector. Shadow credit refers to all kinds of credit created outside formal banking channels.

‪Shanghai Chaori’s latest difficulties come after other Chinese solar-panel makers struggled with meeting U.S. dollar-denominated bond payments. China’s solar industry has experienced a major shakeout over past years, which led to the collapse of bothSuntech Power Holdings Co. STPFQ -7.36% and LDK Solar Co. LDK -1.94% , once some of the world’s largest solar manufacturers.

‪However, Chinese solar manufacturers are ratcheting up production and seeing stronger bottom lines amid a nationwide build-out of solar power. That is a turnabout from a year ago, when overcapacity produced a glut of solar panels sending global prices down by 30% even as demand for panels grew.

Last year, Suntech, once the largest maker of solar panels, defaulted on $541 million in convertible notes issued to foreign investors. Suntech later filed for liquidation in the Cayman Islands, where it is incorporated, and for bankruptcy protection in the U.S., where it was publicly listed.

‪LDK, once the world’s largest maker of solar wafers, last month filed for liquidation in the Cayman Islands, where it is incorporated, but said it had “no intention” of filing for bankruptcy in China.