China: First SOE bond haircut – ING

China gets its first SOE bond haircut and even though it is positive for the development of the onshore bond market, this will create short-term volatilities, according to Iris Pang, Economist at ING.

Key Quotes

“Dongbei Special Steel Group’s bond holders agreed to accept 78% haircut on cash settlement if their holdings are more than CNY500,000, and they will enter debt-equityswap deals for the portion over that amount.”

“This is a very significant event for the onshore corporate bond market. We think the market will no longer perceive the risk of holding SOE bonds is similar to a quasigovernment bond with implicit government guarantee. Put simply, SOEs are no longer “better than” POEs in terms of default settlement terms.”

“The haircut sends a strong signal to onshore market participants that they need to hedge against default risks. In turn, this will help the development of CDS market. This also sets an example for other SOEs that are under deleveraging. There will not be any lifelines provided by state-owned asset management companies, and this is easier for the deleveraging process to yield result.”

“All these are likely to lead to a healthier development of the onshore bond market. Yet, this is not without costs. We expect the first SOE haircut event to trigger investors adjusting their bond portfolios, which implies short-term volatiles in the onshore bond market.”