Steelmaker’s default highlights overcapacity and impact of slowing economy25 July, 2012, 15:18. Posted by Zarathustra
Chongqing Iron and Steel Company is said to have defaulted on some of its debt in the past few years, totalling to some RMB3.6 billion, once again highlighting the difficulties steelmakers are facing amid slowing demand and over-capacity.
The company is said to have defaulted on loans and financing leases from HSBC, China Development Bank and CCB Financial Leasing Corp, totalling to RMB3.6 billion according to 21st Century Business Herald. Of the RMB3.6 billion of loans, RMB887 million of which was a syndicated loans led by HSBC. Curiously enough, the company has breached the debt covenant already, thus the company has technically defaulted on this loan. Breaches in debt covenants have happened too with a long-term loan of RMB1.323 billion from the China Development Bank. The report has not specified exactly which parts of the covenants in these two cases have been violated. The company is said to be negotiating with banks regarding these obligations.
Meanwhile, a financing lease contract with CCB Financial Leasing has been breached in 2010 as the company’s debt/asset ratio reached 74.65% by the end of 2010. The contract stated that debt/asset ratio should not be above 70%, thus the company has technically defaulted on this RMB1.4 billion obligation. CCB subsequently relax the contract terms so as to avoid the termination of the leasing.
The debt situation, of course, did not improve from there as the economy slows more noticeably after the company has breached the contracts. Debt/asset ratio has risen further to 84.32% by the end of 2011 according to the report.
This is quite remarkable, especially if one considers that the Chinese economy only started to slow more significantly last year, while this particular steelmaker was already having difficulties in not breaching the debt covenants. Individual company’s operation aside, we know that the steel industry has enormous over-capacity, and the matter is likely to be made worse as the economy slows.