More Chinese firms seen heading for defaults on debts

Higher funding costs and slowing growth seen weighing down mainland companies

PUBLISHED : Friday, 28 March, 2014, 1:40am
UPDATED : Friday, 28 March, 2014, 2:01am

More mainland firms are heading towards default as higher funding costs and slowing growth weigh on debt commitments, according to Morgan Stanley.

"The pressures are now on for the corporate default rate to be moving higher," said Viktor Hjort, the Hong Kong-based head of Asia fixed-income research at the US lender. "Any economy that generates defaults usually needs three things - leveraged balance sheets, sluggish growth and tighter financial conditions. China ticks all three boxes."

Mainland issuers pay an average 6.22 per cent for dollar-denominated securities, after yields touched 6.39 per cent on March 20, the highest since September last year, JP Morgan Chase indices show. Top-rated firms pay an average 6.05 per cent for 10-year notes onshore, the most in a month and poised for the biggest monthly rise since November, according to Chinabond indices.

Corporate borrowing spiralled during the global credit crisis, as Beijing encouraged banks to lend to support the economy. Financial firms are now clamping down on non-performing loans and curbing lending, pushing up the cost of servicing this debt as the economy slows.

A preliminary gauge of manufacturing missed estimates this week, suggesting this month's factory output weakened for a fifth consecutive month.

Solar-cell maker Shanghai Chaori Solar Energy Science & Technology became the first company on the mainland to default on its onshore notes earlier this month.

"Access to credit has become increasingly tight," Hjort said. "That's what's starting to create tensions in terms of credit risk in China, creating the basis to expect default rates will go up, and is the main reason why one needs to be cautious."

The mainland's economic growth is expected to slow to 7.4 per cent this year, according to the median estimate of 55 analysts surveyed. Lending by Agricultural Bank of China, the nation's third-largest, grew 12 per cent last year, down from 14 per cent in 2012, according to its annual results.

The seven-day repurchase rate, a gauge of funding availability in the interbank market, climbed 96 basis points to 4.84 per cent yesterday. The measure rose for an 11th straight day, the longest streak in seven years.

The cost of insuring Asia-Pacific corporate and sovereign bonds from default rose, credit-default swaps traders said.

Credit-default swap indices are benchmarks for insuring bonds against default and traders use them to speculate on credit quality.