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The Korea Herald
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THE INVESTOR
March 29, 2024

Finance

China Energy Reserve & Chemicals Group’s default triggers China-phobia

  • PUBLISHED :June 05, 2018 - 19:41
  • UPDATED :July 16, 2018 - 16:39
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[THE INVESTOR] China Energy Reserve & Chemicals Group, which reportedly has the backing of oil giant China National Petroleum Corp., promised Korean investors that it will redeem the US$350 million of debt it defaulted on by the month-end, industry sources said on June 5.

A group of representatives comprising seven Korean financial institutions that were involved in selling or investing in the asset-backed commercial papers of affiliate CERCG Overseas Capital in Hong Kong visited the Chinese company’s headquarters on June 4 to discuss the default risk triggered by its failure to repay the debt it guaranteed in May.

The default raised the possibility of a cross-default on two sets of offshore bonds backed by the Chinese oil and gas firm including asset-backed corporate paper worth 165 billion won worth (US$153 million) issued in Korea.

It is also igniting a so-called “China-phobia” in the Korean debt market where Korea-listed Chinese companies have a negative image due to accounting fraud and false disclaimers.

“We feel duped because we had no idea that CERCG would default since we thought it was backed by the Beijing municipal government, and had high credit ratings,” an official at a Korean institutional investor said on the condition of anonymity.




On May 28 -- only three days before the default was announced citing liquidity problems -- Hanwha Investment & Securities and Ebest Investment & Securities issued the CPs for CERCG Capital, with two credit agencies giving the bonds high ratings. 

Five other financial companies including HMC Investment and Securities and KTB Asset Management invested in the CPs, with their investment ranging from 60 billion won to 15 billion won for each companies.

The Korean firms are demanding early repayment of the 165 billion won debt and collateral.

The Chinese company was reluctant to accept the demands, saying it plans to resolve the problem by injecting funds by raising capital from the largest shareholder or investment placement to repay the US$350 million it has defaulted on, the sources said.

Korean rating agencies Nice Investors Service and Seoul Credit Rating are now facing criticism for giving a high rating of A2 to the CPs, which they did because they considered CERCG as state-owned. 

That’s not the case, although the company’s largest shareholder is the Beijing municipal government. The agencies have cut the rating to C following the recent developments.

Gripped with concern, five of the Korean financial companies that invested in the CPs are mulling a lawsuit against Hanwha and Ebest, if CERCG fails to repay the debt.

By Park Ga-young (gypark@heraldcorp.com)

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