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A major Chinese commodities trader became the biggest dollar bond defaulter among the nation’s state-owned companies in two decades, in a moment of reckoning for Beijing as it struggles to contain credit risk in a weakening economy.

Tewoo Group Corp. announced results of its unprecedented debt restructuring, which saw a majority of its investors accepting heavy losses. This is expected to reshape investors’ perceptions about government-owned borrowers whose identity has for years offered a relatively strong sense of security.

It’s also seen offering a road-map for resolving similar debt crises in the future as the prospect of more failures by state-backed firms looms.

The one-time Fortune Global 500 company from the northern port city of Tianjin said dollar bond investors representing 57% of the the total $1.25 billion have agreed to be paid just 37 to 67 cents on the dollar, depending on the maturity of the debt. Bondholders representing 22.6% of these bonds voted to exchange their debt for new bonds with sharply lower coupons to be issued by Tewoo’s offshore debt manager, a state asset manager from Tianjin.

“This is one form of default based on our definition,” said Ivan Chung, a Hong Kong-based analyst at Moody’s Investors Service, noting that the debt revamp has resulted in losses for investors.

Safe Haven No More Defaults by China state-owned firms climb to record high level in 2019 Source: Bloomberg

The debt restructuring plan, first of its kind for a Chinese state-run enterprise in the dollar bond market, came ahead of $300 million dollar bond maturity on Dec. 16, one of the four notes covered by Tewoo’s debt restructuring plan. Tianjin State-owned Capital Investment and Management, its offshore debt manager, said on an investor call late last month that Tewoo is very likely to default on this paper.

For investors who turned down the offers, their dollar bonds will be grouped into a comprehensive debt plan involving Tewoo’s onshore debt, according to Tianjin State-owned Capital.

Tewoo said settlement of the debt restructuring offers are expected to be on or about Dec. 17.

Tewoo’s failure in the dollar bond market, the biggest for a Chinese SOE since the collapse of Guangdong International Trust and Investment Corp. in 1998, is a sign that the worst economic slowdown in three decades is limiting Beijing’s capacity to bail out its weaker state firms. As a result, the authorities appear increasingly willing to use a more market-oriented approach to clean up the mess.

“Tewoo’s default is a landmark case, and demonstrates a growing tolerance for defaults by distressed SOEs,” Cindy Huang, an S&P Global Ratings credit analyst said in a note.

Tianjin “is not an exception” and other local governments with deteriorating fiscal conditions might also see eroding support for their less competitive SOEs, it said.

Setting Precedent

Tewoo’s crisis came as a wake-up call for investors.

“This is a poor outcome for investors that bought the bonds at par. That said, there is now some track record as to the severity of loss for an SOE-related entity,” said Charles Macgregor, head of Asia at Lucror Analytics.

“Hopefully, these types of restructures will bring more discipline to the market and result in investors properly pricing for the apparent risk,” he added.

Tewoo is owned by the Tianjin 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.

— With assistance by Hong Shen, Ina Zhou, Tongjian Dong, and Denise Wee

( Updates with chart on China SOE bond defaults )