Investors wary of Chinese bonds

PUBLISHED : Tuesday, 12 July, 2011, 12:00am
UPDATED : Tuesday, 12 July, 2011, 12:00am


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The Greek debt crisis and concerns about the veracity of the financial statements of Chinese companies have hit Asia's high-yield debt market, especially bonds sold by mainland companies with short track records.

Mainland firms are heavy borrowers in the US-dollar bond market. They often pay annual interest rates of 10 to 15 per cent. Although state-owned mainland companies are able to secure loans, banks are often reluctant to lend to private-sector firms because of their short history of profitability and the high levels of debt they have incurred.

Marketers of Asian high-yield debt said the demand from international investors had been weakened by the euro-zone debt crisis and concerns over the governance of some companies - such as Toronto-listed timberland firm Sino-Forest Corp, which has issued high-yield bonds.

Of late, American research firm Muddy Waters accused Sino-Forest of overstating its timber holdings. Sino-Forest bonds subsequently plunged by 50 per cent in the first week of June.

The news also triggered a sell-off of other mainland corporate bonds, which have become the worst performers in the Asian high-yield debt market.

'What has happened to Sino-Forest has alerted investors to look carefully at Chinese companies,' said Jeremy Amias, co-founder of fixed-income brokerage Amias Berman and Company.

'I don't know whether those accusations are true, but the story has raised the level of concern among investors...especially with lesser-known issuers. The same concerns could exist with IPOs.'

Mainland property developers, regular borrowers in the high-yield debt market, turned out to be more resilient. But the same cannot be said of those in the industrial sector, most of whom have performed badly.

China Automation Group, which went public in 2007, was among the casualties. It lost 7 per cent on average since issuing a bond in April. In the same month, the US-dollar bond issued by Winsway Coking Coal Holding fell 6 per cent. The company was listed on the Hong Kong bourse last year.

The smaller and newly established yuan-denominated bond market also took a hit. Last Friday, China ITS (Holdings) said it had backed out of issuing yuan-denominated bonds. Last June, China ITS raised HK$600 million in its initial public offering.

'These companies were able to sell yuan bonds paying investors 5 per cent interest,' said a director of bond sales at an international bank. 'Now nobody's buying them, even if they are paid 10 per cent.'

Fund managers expect the issuance of more new bonds despite the poor sentiment. But unless companies are willing to pay higher interest rates, investors may not be prepared to fork out the cash.

'The higher-grade bonds have much better liquidity now,' said Helen Lam, senior portfolio manager with RCM Asia-Pacific, who manages a newly launched fixed-income fund that invests in offshore yuan bonds. 'But there's still some way to go before the bonds come back to trading at par.'