Chinese bond issuers sweeten terms for investors
Tighter credit amid economic slump prompts more companies to tap the market for funds
China ZhengTong Auto Services, the luxury car dealer that scrapped a bond sale last year, is planning to sell credit-enhanced notes as concern grows about Chinese companies' US$1.9 trillion of debt.
The seller of cars made by BMW and Tata Motors' Land Rover is talking to investors about an offering of US dollar-denominated securities backed by Bank of China to refinance loans due this year. Mainland and Hong Kong borrowers' total debt has almost doubled since 2009.
The country's issuers, struggling with falling profits and mounting obligations amid an economic slowdown, are less able to service debt than a year ago, Standard & Poor's says. Yields on US dollar bonds sold by mainland companies have risen 99 basis points this year to 6.26 per cent, Bank of America Merrill Lynch indices show. Corporate securities pay 3.19 per cent globally.
"A lot of companies need to come to the market," said Kaushik Rudra, the global head of credit research at Standard Chartered. "They'll probably be looking at structures to attract a bigger audience and find more support for their names."
Borrowing by mainland corporates would probably exceed that of US peers within the next two years, S&P wrote in a report in May. These companies will need more than US$8 trillion for refinancing during the five years ending 2017, accounting for half of such needs in Asia, S&P said in the report.
More than 50 per cent of US dollar bonds sold by mainland or Hong Kong companies last quarter were marked to repay debt. That compares with at least 37 per cent last year.
Mainland corporates boosted sales of credit-enhanced notes, which carry pledges of support from banks or companies, to the highest since April last month. Keepwell agreements, which state that a China-based parent will maintain the issuer's solvency, were used to sell US$650 million of bonds last month.
Financing costs are rising while non-payment concerns expand as Beijing moves to rebalance growth from smokestack to consumer industries.
Hidili Industry International Development, a coal miner, last month reported financing costs of 261.3 million yuan (HK$328.4 million) for the first half, contributing to a 269.2 million yuan loss in the period. Winsway Coking Coal, a Chinese importer of fuel for steel making, is offering to buy back bonds due 2016 at as little as 32.5 per cent of the bonds' value at issue, citing possible repayment difficulties.
LDK Solar said on Wednesday it was in talks with noteholders of its 2014 securities to delay interest payments that were due on August 28.
Suntech Power is also trying to renegotiate obligations.
"There was insufficient differentiation" among industrial issuers by investors, said Tim Jagger, a portfolio manager at Aviva Investors Asia.
"They all seemed to come in a bunch rather than people thinking about where the credits deserved to be priced.
"Investors learned their lesson the hard way which is now why industrial companies coming to market get more scrutiny."