Commentary on Political Economy

Wednesday, 9 December 2020



Unigroup Bond Failure to Trigger $2.5 Billion Cross Default

Updated on 
  • Chinese chipmaker warns on $450 million bond due Thursday
  • Unigroup earlier defaulted on a local bond amid financing woes

Tsinghua Unigroup Co. said it won’t be able to repay the principal on a $450 million dollar bond due Thursday, which would trigger cross defaults on a further $2 billion of debt.

The three other bonds are a $1.05 billion note due 2021, a $750 million bond due 2023 and a $200 million bond due 2028, the company said in a filing to the Hong Kong stock exchange late Wednesday. This would be the first dollar bond default by the Chinese chipmaker, which defaulted on a 1.3 billion yuan ($199 million) local bond in mid-November. Trading of the $450 million dollar bonds will remain halted until further notice, according to the filing.

The dollar bond default would boost concern about the health of China’s state-linked companies, after a spate of defaults last month roiled the domestic credit market. The recent defaults among state firms represent a shift from the past two years, when occurrences were mostly among private sector companies.

The company’s dollar bond due 2023 fell nearly 2.2 cents on the dollar to 22.8 cents as of 9:42 a.m. Hong Kong time, the biggest drop since Nov. 17. Its 2021 dollar note slid 1.6 cents to 28.3 cents, the most since Nov. 30.

“We should see rising refinancing and repricing risk for weaker state-linked firms, which will lead to a rising default rate,” said Andrew Chan, an analyst for Bloomberg Intelligence. “Bailouts are unlikely, in our view, as China aims to restructure, consolidate and eliminate zombie-like state-linked firms unless it leads to systemic risk.”

Tsinghua Unigroup's dollar bonds under pressure since onshore default in November

Unigroup earlier warned it may also fail to repay the interest on a 5 billion yuan bond due Thursday. The company’s finances have deteriorated sharply in the last three years after embarking on a borrowing spree to fund takeovers and other investments intended to boost its position in the chip industry.

Founded in 1988, Tsinghua Unigroup is a business arm of Tsinghua University, the country’s top tertiary institution that counts President Xi Jinping as an alumnus. The company’s net loss widened to 3.38 billion yuan in the first half this year from 3.2 billion yuan a year ago, according to the firm’s latest interim financial report.

“The next default event to watch out for could be its parent company Tsinghua Holdings, but their bonds are already trading at distressed levels so it’s being priced in,” Chan said. “This event will prompt rising concern about onshore stress spilling over into the offshore market.”

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