A unit of Guosen Securities, China's eighth-largest investment bank, has defaulted on a Hong Kong-traded renminbi bond, according to a document seen by the Financial Times, marking the first debt breach by a state-owned enterprise in China's offshore market in nearly two decades.
The technical default by Guosen's Hong Kong affiliate puts at risk a Rmb38m ($5.9m) coupon payment due April 24 on Rmb1.2bn in "dim sum" bonds sold in 2014. Missing that payment would set a precedent for the offshore units of Chinese SOEs, whose creditors widely assume the onshore parent will always stand behind its affiliates, according to analysts.
The default was unexpected because Guosen's onshore unit is by all appearances in rude health. With the city government of Shenzhen as its largest shareholder, Guosen Securities was 12th in the league table for onshore equity underwriting in 2015, according to Dealogic, down from fourth in 2014.
The Shenzhen-listed brokerage earned net profit of Rmb14.2bn in 2015, up 188 per cent from a year earlier, according to a filing in January. It ranked eighth among mainland brokerages by assets at the end of 2014, according to industry association figures.
Like other Chinese securities companies, Guosen benefited from a surge in stock trading commissions during China's equity market roller coaster last year. But its offshore unit, Guosen Securities (HK) Financial Holdings, has struggled to gain a foothold in Hong Kong's capital markets, where foreign and mainland banks compete on a more level playing field.
A special purpose vehicle owned by Guosen (HK) issued the bonds in April 2014 at an interest rate of 6.4 per cent.