Analysis Of The Causes And Risks Of WINTIME ENERGY Bond Default

The bond market in China became the second largest in the world,although its growth rate has slowed down since the second half of 2016.Meanwhile,the wave of bond defaults started to release that the scale was large in 2018 and 2019.Wintime Energy,carried out related and diversified expansion by issuing a large number of bonds due to loose financing policies before.But in July 2018,the company defaulted on its bond and subsequently triggered multiple bond defaults due to cross-default clauses.Besides,the downgrade didn’t show up until the bond default.What led to the bond default and can the risks be forecasted are worth thinking about.Based on the domestic and international researches about financial distress,bond defaults and their risks,the cause of the bond default can be viewed from four dimensions through the case study of Wintime Energy.First,the macro-economic downturn and supply-side structural reform have greatly impacted the coal industry,which is characterized by overcapacity and strong cyclical.At the same time,deleveraging made bond financing difficult and easy to generate financial distress.Second,the strategy of the enterprise was not good.Blindly and radically relying on loans and bond financing for diversification can accumulate credit risks.Third,settings of the interest and trigger conditions of the cross-default clauses lacked of a good balance.Fourth,from the financial perspective,the continually declining weighted return on equity,fal ing gross margin of power and petrochemical areas which pulled down the overall one,decreasing coal sales due to supply-side reform,and high financial expense ratios all indicated the dip of profitability.Moreover,the company was over-leveraged that with a high asset-liability ratio it kept using bond financing to repay the debts brought by expansion.Meanwhile,the size of the restricted assets was too large.All of these made the capital chain of Wintime Energy broken and the company started to trigger other bond defaults.Modified Z-score model and default distance model were used to measure the default risks of Wintime Energy and the results were compared to the grade given by rating agencies to explore whether bond defaults can be predicted.Finally,based on the above analysis and discussion,inspiration was drawn for issuing entities,rating agencies and investors,hoping that readers can be aware of similar enterprises with overcapacity and abnormal leverage ratio in strong cyclical industries.