When a bankruptcy is not a bankruptcy

China Insolvency Wave Begins As Nation's Biggest Provincial Borrowers "Defer" Loan Payments

Zero Hedge,

26 December, 2011

Remember, back in the day, when a bankruptcy was simply called a bankruptcy? 

Naturally, this was well before ISDA came on the scene and footnoted the living feces out of everything by claiming that a bankruptcy is never a bankruptcy, as long as the creditors agree to 99.999% losses at gunpoint, with electrodes strapped to their testicles, submerged in a tank full of rabid piranhas, it they just sign a piece of paper (preferably in their own blood) saying the vaseline-free gang abuse was consensual. 

Well, now we learn that as the global insolvency wave finally moves to China, a bankruptcy is now called something even less scary: "deferred loan payments" (and also explains why suddenly Japan is going to have to bail China out and buy its bonds, because somehow when China fails, it is the turn of the country that started the whole deflationary collapse to step to the plate). 

After all, who in their right mind would want to scare the public that the entire world is now broke. Certainly not SWIFT. And certainly not that paragon of 8%+ annual growth, where no matter how many layers of lipstick are applied, the piggyness of it all is shining through ever more acutely. Because here are the facts, from China Daily, and they speaks for themselves:

 "China's biggest provincial borrowers are deferring payment on their loans just two months after the country's regulator said some local government companies would be allowed to do so....Hunan Provincial Expressway Construction Group is delaying payment on 3.11 billion yuan in interest, documents governing the securities show this month. Guangdong Provincial Communications Group Co, the second-largest debtor, is following suit. So are two others among the biggest 11 debtors, for a total of 30.16 billion yuan, according to bond prospectuses from 55 local authorities that have raised money in capital markets since the beginning of November."

 So not even two months in and companies are already becoming serial defaulters, pardon, "loan payment deferrers?" And China is supposed to bail out the world? Ironically, in a world in which can kicking is now an art form, China will show everyone just how it is done, by effectively upturning the capital structure and saying that paying interest is, well, optional. In the immortal words of the comrade from Georgia, "no coupon, no problem."

Our advice: go long Teva, which recently acquired Cephalon, and its wonderful drug Provigil, which is basically legalized cocaine, speed, meth and heroin all in one perfectly legal pill, as the newsflow, up until now only picking up with the idiot headlines out of Europe at 3 am Eastern is about to become one constant 24/7 flashing red rumor/disinformation mill. Also, next time someone wants to make THE drug cocktail of choice for the headline reacting speed trading junkie, please name it appropriately. Jeffrey will suffice.

More on China's piglipsticking:

As local governments delay payments for projects commissioned as part of the stimulus to ward off recession in 2009, less money is available for bank lending even as China is taking steps to inject more into the economy. The central bank has held interest rates at 6.56 percent since July to boost the economy, while the US Federal Reserve and the Bank of Japan have kept benchmark rates near zero since 2008.

"When companies start to roll over debt they're not retiring debt, and banks aren't retrieving their capital, so you're crowding out new lending," Patrick Chovanec, a professor at Tsinghua University in Beijing, said in a Dec 13 interview. "This is a problem that's going to start to bite next year."

Local governments had 10.7 trillion yuan in debt at the end of last year, 79 percent due to banks, according to the country's first audit released in June. So-called local financing vehicles that meet collateral requirements can have a one-time extension on their loans, Zhou Mubing, vice-chairman of the China Banking Regulatory Commission, said at a conference on Oct 24 organized by the Internet portal Sina.com.cn, according to a transcript of his comments on the website.

Guangdong Provincial Communications Group, Hunan Provincial Expressway Construction Group, Gansu Provincial Highway Aviation Tourism Investment Group Co and Sichuan Railway Investment Group Co owe more than 200 billion yuan to banks, the data show. They plan to defer 34.4 billion yuan in interest payments, according to their bond prospectuses.

Yes, that's a lot, and it's going to get much worse. But not if you listen to Beijing Bob: yes, even communist countries have a department of propaganda:

Lei Wanming, Gansu Highway's deputy Communist Party secretary, said the company's interest payment deferrals do not raise any concerns. "Our company can pay our interest and our principal payments with no problem," he said in a Dec 5 interview. "You can't just consider this issue by looking at a bond prospectus."

Said otherwise, all is good, and China's 'relatively fast' growth is still on the agenda:

National leaders set a goal of "relatively fast" economic growth for 2012 at a major conference in Beijing that ended on Dec 14, according to the Xinhua News Agency. The global outlook "remains very grim", Xinhua cited the leaders as saying.

What is most ironic is that Meredith Whitney will be right... just wrong about the country.

The extra yield required to hold Hunan Provincial Expressway's 900 million yuan in 2012 bonds has increased to 308 basis points from 151 basis points on June 21, when they were issued. That compares with a current spread of 11 basis points on Shenzhen's five-year direct municipal bonds. 

Yields on local government financing company bonds will remain high next year as selling debt becomes a main channel for raising funds, China International Capital Corp analysts led by the fixed-income analyst Xu Xiaoqing wrote in a Dec 16 research note. Most of the bonds are sold at yields of 8 percent, or 144 basis points more than the benchmark bank lending rate, according to the report. Five-year top-rated corporate bonds yield 4.98 percent, according to Chinabond, the nation's bond clearing house.

"Although the China Banking Regulatory Commission has recently eased loan restrictions to help liquidity, recent supply has been increasing, causing the secondary market to pay attention to systemic risks," they wrote. "The credit quality of recent financing vehicle bonds continues to get weaker."

For those who refuse to swallow China's lies, there is one way around it:

Five-year credit-default swaps insuring against default on China's sovereign debt rose 3.2 basis points recently to 149.66 basis points, according to data provider CMA...

As more and more scratch their heads, the math is clearly not your friend:

Even after the reduction in interest payments, Gansu Provincial Highway said that interest and principal payments in 2011 will amount to 3.33 billion yuan, more than its 2010 cash flow of 3.04 billion yuan, according to bond-marketing materials.

"This prospectus is telling us that banks can expect to only receive roughly half of what would have been expected in interest payments," Charlene Chu, a Beijing-based banking analyst with Fitch Ratings, said of the Gansu disclosure.

And as for what happens when an entire continent is stuck fighting simple math and failing, we refer you all to the case study that is Europe.

So as we all prepare for what is set to be, without doubt, a relentless barrage of headlines, lies, innunedo, rumors, media counterrumors, more lies, propaganda, from Europe, the US and now Asia, here, again, is Jeffrey.