China Credit Trust Delays Repayment on $210 Million Product

Jul 25, 2014 3:07 am ET

(Updates with analyst comment in fourth paragraph; trust firm’s comment in sixth.)

July 25 (Bloomberg) -- China Credit Trust Co. delayed payments on a 1.3 billion-yuan ($210 million) high-yield trust product backed by coal-mining assets after the borrower failed to raise funds to repay investors.

The Beijing-based company will extend the maturity of Credit Equals Gold No. 2, which was scheduled to expire today, according to a statement distributed to investors in the product and seen by Bloomberg News. China Credit Trust aims to sell assets held by the product within 15 months to repay investors, the July 24 statement showed.

The product is at least the second of China Credit Trust’s to face difficulties this year and highlighted rising default risk in China’s $1.9 trillion trust industry. Credit Equals Gold No. 1, created to raise 3 billion yuan for a coal miner, was bailed out days before maturity in January, averting what would have been the nation’s first trust default in at least a decade.

The Credit Equals Gold No. 2 product “is a very unique problem,” Du Changchun, a Shanghai-based analyst at Northeast Securities Co., said by phone. “Under normal circumstances, it’s unlikely that the government will take the initiative to let it default. The probability is low.”

Chinese financial markets were unfazed by the news as stocks rose, while currency and money markets were little changed. The Shanghai Composite Index gained 0.9 percent as of 2:43 p.m. local time, while the yuan fell less than 0.1 percent. The cost of one-year interest-rate swaps was little changed at 3.84 percent.

Mining Projects

China Credit Trust confirmed the payment delay in an e- mailed statement today. Credit Equals Gold No. 2 paid investors a total of 264 million yuan in three annual interest payments since 2011, with annualized return rates of 10.5 percent, 10.8 percent and 5.17 percent respectively, the trust said in the statement.

The Securities Daily reported the maturity extension earlier today.

China Credit Trust created Credit Equals Gold No. 2 in July 2011 to raise funds for mining projects for Shanxi New North Group Co., a coal company based in the northern Chinese province of Shanxi.

The trust company will urge the coal company to resume production and restructure its assets, and is also actively looking for buyers of the trust assets, according to yesterday’s investor statement.

Biggest Shareholders

China Credit Trust’s top three shareholders are state-owned enterprises. People’s Insurance Company (Group) of China Ltd. owns a 33 percent stake, making it the biggest investor, according to the trust firm’s website.

The nation’s trusts can invest across all asset classes from loans and real estate to bonds and commodities, under China Banking Regulatory Commission supervision. The products typically require individuals lured by the promise of high returns to invest at least 1 million yuan, with proceeds often channeled to corporate and local-government borrowers.

At least 15 trust products have been reported to run into repayment difficulties this year, according to UBS AG, citing media accounts and company disclosures. At the same time, local governments are working to avoid defaults, brokering deals between corporates and banks, and leaning on lenders to provide bridge loans or take over shadow credit, Wang Tao, chief China economist at UBS, wrote in a July 10 note.

Default Risk

In April, the CBRC ordered owners of the nation’s 68 trust companies to be prepared to provide funding or sell their stakes as the risk of defaults increases. Trust assets expanded almost 8 percent in the three months through March to a record even after a government crackdown on shadow banking and a rise in defaults.

Investors in another trust product, created by state-backed Jilin Province Trust Co. to raise funds to finance mining projects for a private coal miner, had staged protests in Beijing and in Shanxi province earlier this year after the 973 million-yuan product missed at least six payments.