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A major Chinese commodity trader looks poised to become the most high-profile state-owned enterprise to default in the dollar bond market in over two decades. In a fresh sign that Beijing is more willing to allow failures in the politically sensitive SOE sector, Tewoo Group has offered an unprecedented debt restructuring plan that entails deep losses for investors or a swap for new bonds with significantly lower returns.

What’s the company:

Tianjin-based Tewoo Group Co. is owned by the local government and operates in a number of industries including infrastructure, logistics, mining, autos and ports, according to its website. It also has footprints in countries including the U.S., Germany, Japan and Singapore.

The trader ranked 132 in 2018’s Fortune Global 500 list, higher than many other conglomerates including service carrier China Telecommunications Corp. and financial titan Citic Group Corp. It had an annual revenue of $66.6 billion, profits of about $122 million, assets worth $38.3 billion, and more than 17,000 employees as of 2017, according to Fortune’s website.

The firm is neither listed on any stock exchange nor rated by the top three international ratings companies.

What’s happening:

Tewoo Group’s financial difficulties came to the fore in April when it sought debt extension from its lenders and sold copper below market rates amid a cash crunch. That month, Fitch Ratings slashed the company’s credit score by six notches in one go to B- to reflect its weak liquidity and higher-than-expected leverage.

The company has proposed an exchange/tender offer on three dollar bonds due to mature over the next three years, as well as a perpetual note. It is the first distressed plan of its kind from a state-owned firm. Tewoo Group is very likely to default on its $300 million dollar bond due Dec. 16, one of the notes included in the plan, according to buy-side sources citing the company’s offshore debt manager.

Bondholders have just over two weeks to decide between either taking as much as 64% in losses or accepting delayed repayment with sharply reduced coupons on $1.25 billion of dollar bonds.

The proposal comes after Tewoo Group said last week it was unable to repay interest on a $500 million bond, prompting Industrial & Commercial Bank of China Ltd. to transfer $7.875 million to bondholders on its behalf. ICBC provided a standby letter of credit on the note -- effectively a pledge to repay if the borrower can’t. The firm’s remaining $1.6 billion of dollar bonds lack such protection.

Tewoo Group’s units have previously missed local debt payments -- Tianjin Hopetone Co. missed a coupon payment on its 1.21 billion yuan note in July, while Tianjin Haoying Industry & Trade Co. missed paying loan interest due in June.

Earlier this month, Tianjin State-owned Capital Investment and Management Co., an entity wholly-owned by the Tianjin municipal government, was appointed to manage the company’s offshore debt. The entity has no plan to hold controlling stakes in Tewoo Group, according to buy-side sources citing an investor call on Monday. Tewoo Group said it plans to take a series of debt management measures.

Why does it matter:

Tewoo’s likely default suggests that Beijing is finding it increasingly hard to bail out troubled SOEs, let alone private firms, after the worst economic slowdown in three decades. It also raises concerns over Tianjin, where it’s based, following a series of rating downgrades and financing difficulties suffered by some of the city’s state-run firms. The metropolis near Beijing also has the highest ratio of local government financing vehicle bonds to GDP in China.

Investors expect high debt levels to limit the Tianjin authorities’ ability to lend support to the city’s troubled firms, prompting them to shun the latter’s debt. Tianjin Binhai New Area Construction & Investment Group Co. postponed plans to sell a three-year dollar bond offering in July amid such concern.

While bond defaults in China’s local market are approaching the record level hit last year, there have been relatively fewer missed payments offshore.

What do ratings companies say:

Fitch withdrew its rating on Tewoo Group in July due to insufficient information to maintain the ratings. It last rated the issuer at B-. Neither S&P Global Ratings nor Moody’s Investors Service rates the firm.

What are traders watching next:

Bondholders must decide whether to accept the exchange/tender proposal by December 9 and 10 respectively, with the settlement date due on or around December 17.

Investors are also watching closely to see if Tewoo Group’s troubles could cascade to other Tianjin companies, as well as raising concerns over the level of support state firms can expect to receive from Beijing.

Read More:

Tewoo Debt Plan Shows China Is Allowing State Firms to Fail

China’s Tewoo Seeks Debt Haircut of Up to 64% on Dollar Bonds

‘Massive Snowball’ Effect to Spur China Bond Defaults Abroad

China Default Resolutions Rare as Bond Failures Rise: Goldman

— With assistance by Ina Zhou, and Molly Dai