State-owned Dongbei Special Steel Group Co Ltd said it faces “uncertainties” about paying interest on medium-term notes, underlining the challenges for Chinese authorities as they pledge to crack down on “zombie” companies while containing the risks from a mountain of debt. Owned by the Liaoning provincial government in the country’s “rustbelt” northeast, Dongbei formally entered into a bankruptcy restructuring process in October aimed at recovering a reported $10 billion in debt. The company has been at the heart of troubles in China’s debt market, defaulting on nine separate bonds last year, and the province is home to other struggling state steel mills such the Anshan Group and the Benxi Iron and Steel Group. Investors have turned jittery about likelihood of bailouts for key state-owned state enterprises, especially in coal and steel sectors hobbled by overcapacity. Liaoning’s economy shrank 2.5 percent last year, the only Chinese province to see a contraction. The government has promised to close more than 10 million tonnes of low-grade steel capacity by the end of June this year as part of its efforts to clean up the sector, even as companies such as Dongbei Steel continue to default. Dongbei is due to pay a coupon on April 12 on its 800 million yuan 5.63 percent bond maturing in 2018. Prices of its bonds have shown some signs of recovery in recent months, triggered by hopes of a revival plan reported in local media. That plan was aimed at a return to profit and a slash in leverage ratio in three years’ time. The bonds still trade at stressed levels of 63 cents on the dollar, compared with the issue price of 100. But they are higher than a low of 33 struck in March last year when it missed a payment on an 800 million yuan short-term note several days after the group’s chairman was found dead in an apparent suicide. The statement released via China’s foreign exchange trading platform operator late on Wednesday comes after the company missed a payment on short-term commercial paper in October last year. Profits of Chinese industrial firms surged almost 32 percent in the first two months of 2017 — the fastest pace in nearly 6 years — as prices of commodities from iron ore to steel raced higher, fueled by a construction boom. That should give heavy industry more cash flow to service their debts and reduce leverage — which is a key priority for the central government this year — but some firms saddled with inefficient capacity and weak local demand continue to struggle.
(Reporting by Beijing newsroom, Josephine Mason and Umesh Desai in HONG KONG; Editing by Kim Coghill)