CERCG Defaults on $350M Bond 7 Months After Leading Buyout of the Center

Just seven months after leading the $5.2 billion acquisition of the world’s most expensive building, a little-known Beijing energy firm has defaulted on a $350 million international bond, according to a filing to the Hong Kong Stock Exchange by the company late Monday.

China Energy Reserve & Chemicals Group (CERCG) last November led a joint Hong Kong-Mainland consortium in agreeing to acquire The Center on Queen’s Road Hong Kong from Li Ka-shing’s CK Asset Holdings for a record-breaking HK$40.2 billion.

Now the company, which later bowed out of the buyout consortium, has joined a growing list of mainland companies suffering defaults as Beijing tightens up credit and punishes enterprises seen as making irresponsible acquisitions.

CERCG Financial Belly Flop Triggers Cross Defaults

In its statement to the stock exchange, China Energy Reserve & Chemicals Group Overseas Capital Company (CERCG Overseas Capital), a subsidiary of CERCG, announced that it had failed to pay the principal amount and accrued interest of the $350 million bond due on 11 May 2018. The bond carried an interest rate of 5.25 percent.

The default also triggered cross-defaults on some of the group’s other borrowings including bonds due in 2021 and 2022, the company added. For the bonds due in 2021 and 2022, the oil and gas firm said that it plans to suspend interest payments while indicating that it “propose[s] to engage with the holders of the 2021 Bonds and the 2022 Bonds and their advisors to discuss this, including the suspension of interest payments and a potential consensual restructuring of the 2021 Bonds and the 2022 Bonds.”

According to an account in Bloomberg, CERCG has $1.8 billion in offshore notes outstanding and the recent financial failure also triggered a cross-default on two sets of bonds due next year.

Former Center Buyer Hit by Beijing’s Lending Crackdown

The Beijing-based company attributed the default to tightening credit conditions in the mainland over the past two years, which restricted its access to domestic financing channels including bank loans and onshore bond issues.

“As the cash flow and capital requirements of the Guarantor and its subsidiaries have continued to increase, this has resulted in a liquidity crunch on the Group,” the company said in the filing. “While the Group anticipates it will continue its business operations as usual, it plans to divest certain of its assets in order to resolve its current cash flow difficulties and further announcements will be made in due course.”

Just over one month ago Shenzhen-listed developer Zhonghong Holdings announced that it had defaulted on more than RMB 1.1 billion ($174 million) in debts less than one year after its offshore affiliate had paid $449 million to buy a stake in Seaworld from Blackstone. That default came just nine months after that same unit, Zhonghong Zhuoye, failed in its $4 billion bid to buy out US senior living operator Brookdale.

Last month a representative of New York investment bank Neuberger Berman predicted that the Chinese government’s tighter financial policies could bring a wave of defaults by mainland firms.

Cash Cutback Puts Brakes on Acquisitions

The Chinese oil and gas firm rose to prominence when it took a 55 percent stake in the buying consortium of The Center last year. However, four months later, the company pulled out of the deal by reportedly disposed of its stake to local Hong Kong investors including billionaire Pollyanna Chu, who co-founded the Kingston Financial Group.

Chu said in March that the Beijing company retained a small stake in the consortium, which has decided to convert their respective stakes in the venture into ownership of individual floors. Some of the owners are already in the process of flipping their floors to new buyers.

CERCG’s disposal of its stake in The Center came after the company aborted an attempted $430 million takeover of Australian gas and oil explorer AWE in December last year.