OREANDA-NEWS. Recent defaults in Chinese state-owned enterprises (SOEs) operating in competitive, non-strategic sectors, such as steel and coal trading, will likely be resolved through debt restructuring rather than state-supported full-debt repayment, says Fitch Ratings.

The change is part of the government's supply side reforms, which include a focus on cutting production capacity, particularly in sectors characterised by severe overcapacity and high leverage. The government has signalled it is less willing to support companies in non-strategic sectors with low entry barriers and operations that can be easily replaced by other larger SOEs, should these companies fall into financial distress.

On 11 April 2016, China Railway Materials Company Limited (CRMC), a commodities trader that supplies railway materials, such as iron, coal and cement, applied to suspend trading of nine outstanding domestic notes totalling CNY16.8bn (with the closest maturity due on 17 May 2016). The company cited difficulties in meeting repayment obligations and intends to arrange potential debt restructuring plans with creditors.

CRMC is a subsidiary of China Railway Materials Commercial Corp, which is in turn 100% owned by the State-owned Assets Supervision and Administration Commission. CRMC's sales and EBITDA declined significantly in recent years on back of weak steel and coal prices. In 2014 the company reported total sales of CNY79bn, down 62% from CNY207bn in 2011, and negative FFO for the third consecutive year. Its net debt grew to CNY25.3bn at end-2014, from CNY13.6bn at end-2011.

Fitch expect more companies like CRMC and Sinosteel Corporation, which was the first and so far only central SOE to default on its domestic bonds in October 2015, to face increasing challenges in meeting debt obligation this year. This is a result of an inability to generate consistent operating cash flow amid a weak operating environment and a lack of support from financial institutions and investors to provide refinancing, given government's decreasing support for the sector.