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China chip maker Tsinghua Unigroup to default on US$450 million bond as concerns mount over debt levels on mainland

Chinese chip maker Tsinghua Unigroup said that it cannot repay the principal on a US$450 million bond due on Thursday, the latest default by the company and a blow to Beijing's efforts to build a self-sufficient semiconductor industry.

The failure to repay principal on its debt could trigger cross-defaults on as much as US$2 billion in additional debt held by the company, which is majority owned by a division of Beijing's prestigious Tsinghua University. Tsinghua Unigroup has additional bonds set to come due next year, as well as in 2023 and in 2028.

The Tsinghua Unigroup failed to repay an onshore bond worth 1.3 billion yuan (US$199 million) in November, which led to a downgrade by China Chengxin Credit Rating Group and a suspension of trading of its debt in Hong Kong.

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Tsinghua Unigroup and a subsidiary that issued the US$450 million bond "are looking into various ways to solve their current liquidity issue", the company said.

"Payments of the principal and the last instalment of interest on the bonds are not expected to be made by the issuer or the guarantor on their due date," the company said in a filing with the Hong Kong stock exchange late on Wednesday. "As such, the issuer and the guarantor are of the view that an event of default under the conditions due to a failure to pay the principal and interest on the bonds will occur."

It would be the first US dollar default by a Chinese chip maker as concerns continue to grow about debt levels on the mainland and a series of defaults by state-backed companies.

In the past two months, Yongcheng Coal & Electricity Holding Group, a state-owned mine operator in Henan province, and car maker Huachen Automotive Group, also known as Brilliance Auto, have missed debt payments, sparking sell-offs in some parts of the debt market.

China's corporate bond market is on pace to set a record for missed payments this year, surpassing 143.6 billion yuan in defaults last year. From January to late November, bond defaults already topped 104 billion yuan.

Zhao Weiguo, Tsinghua Unigroup's chairman, owns 49 per cent of the company, which said it expected to default on a US$450 million bond on Thursday. Photo: Simon Song alt=Zhao Weiguo, Tsinghua Unigroup's chairman, owns 49 per cent of the company, which said it expected to default on a US$450 million bond on Thursday. Photo: Simon Song

The Tsinghua Unigroup bond in question was backed by a so-called keepwell guarantee, whose enforceability has been a question mark in the past. Last month, a Shanghai court recognised a 2018 verdict by a Hong Kong court in a €29 million (US$35 million) bond dispute, bringing further clarity to foreign investors about those guarantees.

Tsinghua Unigroup's debt had been selling at a discount after Peking University Founder Group, a conglomerate controlled by Peking University, missed bond payments last year.

The company was founded in 1988 as a business venture of Tsinghua University, which counts Chinese President Xi Jinping as an alumnus, and has been a major player in Beijing's efforts to make China less reliant on imported components for the semiconductor industry against the backdrop of rising tensions with the United States.

It is 51 per cent owned by Tsinghua Holdings, an arm of Tsinghua University, and 49 per cent owned by its chairman Zhao Weiguo.

A 2019 study by the Organisation for Economic Co-operation and Development found that Tsinghua Unigroup received the most government support of 21 chip makers globally, with government support exceeding 30 per cent of its revenue.

Five years ago, the company made an unsuccessful US$23 billion bid for Micron Technology.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.