Bankruptcy of Deruibao Tire Affects 12 Concerning Firms

Shandong province’s tire company Deruibao Tire, which went into bankruptcy last year, has dragged down 12 concerning companies into difficulty.

Before its bankruptcy, Deruibao established credit “inter-connection and inter-guarantee” relations with them.

Most of the 12 firms are tire production-related ones.

Once Popular “Inter-connection and Inter-guarantee”

An industry insider disclosed that the “inter-connection and inter-guarantee” situation has been popular among companies in Dongying, Shandong, particularly in the pillar industry, tire.

“Inter-connection and inter-guarantee” is a traditional way of financing of private companies.

When the loan is granted to a company, the loan on guarantee will be undertaken by companies equally, which is inter-guarantee.

“Joint guarantee” loans refer to three or more than three SMEs voluntarily form a guarantee unit, when one of the company apply for loan from the bank, all the unit members should undertake the joint responsibility of repayment.

A few years ago, China’s tire industry was in a boom. Some companies in Dongying saw the business opportunity but lacked capital, and it was difficult for them to lend from the banks as they also lacked financing credit.

To get loans and boost business development, the SMEs established an “inter-connection and inter-guarantee” liability relation.

However, the “guarantee circle” among companies is risky. Bankruptcy of one company usually led to snowballing “inter-guarantee” falling.

Over the past two years, in the face of market downturn, some tire companies had to rely on government support and bank loans.

Behind the “zombie companies” there are usually a number of “inter-connected and inter-guaranteed” companies, and the “guarantee chain” sometimes turns into a “death chain”.

Great Risk and Danger

Deruibao officially declared bankruptcy in Feb. 2015. After that, Doublestar Tire signed an “asset leasing agreement” with Deruibao and entered into the latter.

Some industry insiders worried that many tire companies in Dongying would collapse like Domino because of such complicated guarantee relationship.

As a result, local government scares of bankruptcy of tire companies. It is said that once a company confronts capital issue, government will help with coping with it.

An industry insider said the “inter-connection and inter-guarantee” method is a destroyer for economic development.

When the economy goes down and sees overcapacity, the amount of guarantee usually exceeds the amount of working capital necessary for a company, and such way of financing will be a disaster for the company.

Today, China’s tire industry is experience overcapacity and the risk and danger of such way of financing is easy to see.