The crash in international crude prices has not only burnt small Chinese investors who bought wealth management products from one of China’s largest banks but also a listed oil and gas firm that announced last week that it would default on a US$248 million bond.
MIE Holdings, controlled by tycoon Zhang Ruilin, failed to make a US$17 million interest payment on its bonds which was initially due on April 12, it said in a statement to the Hong Kong stock exchange. It was still unable to make the payment when the 30-day grace period expired on May 11, resulting in the default.
The bond default triggered cross-defaults on other financial contracts and potentially breaches the terms of additional loans and bonds totalling more than US$287.3 million, MIE said.
Zhang, who is MIE’s chairman, blamed the bond default on a lack of liquidity caused by the collapse of oil prices in the past two months, according to the exchange filing.
For example, Daqing crude oil prices fell from a high of US$69.06 a barrel in January to a low of US$12.33 in late April, a drop of more than 80 per cent.
“The company is experiencing increasing liquidity pressure due to the significant decline in revenue and cash flow caused by recent plunge in crude oil prices,” Zhang said.
The collapse of oil prices also caused the loss of more than 7 billion yuan (US$981 million) by at least 60,000 people across China who had invested in Bank of China’s Crude Oil Treasure wealth management product. The lender said on Saturday it had reached settlement agreements with about 80 per cent of those affected.
International oil prices have recovered in recent weeks after the plunge to their lowest level in 20 years in April, triggered by worries that oil production was significantly in excess of the sharply lower demand resulting from the Covid-19 pandemic. But prices are still down more than 50 per cent this year and demand is far below pre-health crisis levels.
“Demand remains very low by past standards and we don’t expect a sustained rebound in oil prices until the virus is successfully contained,” said Caroline Bain, chief commodities economist at Capital Economics.
Low oil prices are likely to be a key driver in any further corporate bond defaults, which could extinguish the chance for many struggling Chinese private companies to borrow in US dollars and fund the recovery of their operations, ultimately leading to their bankruptcy.
“Given concerns about plummeting oil prices and the liquidity of property developers, the market risk appetite for energy and real estate [products] has declined massively,” said Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis.
“Offshore default risks are clearly rising in both China and Asia,” she said.
With the more challenging prospects for corporate revenues, China’s stressed bonds (defaults, technical defaults and payments within grace periods) in the offshore market had reached US$5.5 billion by the end of April, 35 per cent higher than the total amount for 2019, Herrero said.
The extra costs companies had to pay to borrow from the offshore market compared to borrowing in the onshore mainland market in the first quarter had climbed to their highest level since 2017, she said.
The value of MIE’s assets fell 65 per cent to 2.93 billion yuan last year, with the company suffering an operating loss of 631 million yuan, according to its unaudited annual results.
The company’s cash and cash equivalents at the end of 2019 stood at 13.71 million yuan, a decrease of nearly 50 per cent from 2018 and not enough to cover the US$17 million bond interest payment.
On May 6, just days before the default, Fitch Ratings revoked MIE’s “C” long-term issuer credit rating.
Trading in MIE stock in Hong Kong has been suspended. Its last trading price was HK$0.065 on March 31, down from HK$0.255 in April 2019, making it a “penny stock”. It traded at a peak of HK$4.13 in April 2011.
In addition to its oilfields in Jilin province, MIE has oil and gas assets throughout western Canada, according to its website. It is also involved in the exploration, development and production of petroleum assets in Kazakhstan and northern parts of the South China Sea through joint ventures.
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