* Creditors seek formal bankruptcy restructuring for Dongbei
* Unit Fushun says its operations, capital flows are normal
* Guangxi Nonferrous default may set precedent for Dongbei
(Adds additional background, analyst quote)
By Winni Zhou and Nathaniel Taplin
SHANGHAI, Sept 30 Fushun Special Steel
said on Friday a court is reviewing an application
from creditors for a bankruptcy restructuring of parent Dongbei
Special Steel Group Co Ltd.
Fushun Special Steel said in a statement on the Shanghai
stock exchange website that its own operations and capital flows
were normal. State-owned steelmaker Dongbei Special Steel, an
unlisted company, owns 35.22 percent of Fushun.
The announcement comes as the corporate bond market, which
suffered a steep sell-off this spring, is again trading near
multi-year highs despite ongoing defaults and rising concern
over the scale of China's corporate debt problems.
Dongbei, which is owned by the Liaoning provincial
government in the country's northeast, has been at the heart of
the debt market's troubles this year. Its first bond default in
late March helped trigger a sharp sell-off in corporate debt as
investors reassessed the likelihood of bailouts for key
provincially-owned state enterprises, especially in coal and
steel sectors hobbled by overcapacity.
The firm, which has defaulted on nine separate bonds in
2016, has also been involved in an extended struggle with
creditors over how to restructure its debt, according to Reuters
IFR and other media publications. Dongbei Special Steel could
not be reached for comment.
Dongbei had reportedly proposed a debt-to-equity swap as a
partial solution to the problem, but creditors objected. In
July, creditors took the unusual step of urging one of Dongbei's
main underwriters, China Development Bank, to ask regulators to
temporarily bar Liaoning province from further debt financing.
China Development Bank said later that it would continue to
support the economic development of Liaoning.
On Sept. 28, the Economic Observer said Dongbei Special
Steel had ironed out a business revival plan and was seeking
government support for its debt restructuring.
With the disclosure that Dongbei creditors are seeking a
bankruptcy restructuring, the status of those plans is unclear.
A court-managed bankruptcy process will not necessarily end
in liquidation, but analysts said the recent court-ordered
liquidation of Guangxi Nonferrous Metal Group, another
provincially-owned enterprise, sets a worrying precedent.
Several state-owned issuers have defaulted on their
obligations, however investors have yet to suffer heavy
principal losses on a public bond until now. Some borrowers have
managed to repay bondholders in full after securing funding
elsewhere, while others have extended their maturities. In some
cases, negotiations remain ongoing.
The Guangxi Nonferrous case may change that, analysts said.
"Bondholders of Guangxi Non-Ferrous Metals are likely to
take a haircut," said Ying Wang, senior director of corporate
ratings at Fitch.
(Additional reporting by Ina Zhou at IFR; Editing by Stephen
Coates and Jacqueline Wong)