More China industry defaults loom as Beijing switches growth focus

Beijing's move to focus mainland economy on services coincides with rise in borrowing costs

PUBLISHED : Thursday, 12 September, 2013, 12:00am
UPDATED : Thursday, 12 September, 2013, 3:15am

Mainland firms will miss more debt payments in the coming year as smokestack industry losses mount on Premier Li Keqiang's plan to switch the economy's focus towards services, according to Standard & Poor's.

The yield on Anyang Iron & Steel's 2019 notes has jumped 386 basis points this quarter to 10.7 per cent after China Chengxin Securities Rating reduced its rating to AA-minus from AA in June. Industrial debt globally yields 3.4 per cent, according to Bank of America Merrill Lynch indices.

Rating cuts also sent borrowing costs up at Jiaozuo Coal, Yanzhou Coal Mining and Jiangxi Rare Earth & Rare Metals Tungsten.

Metal producers were the worst hit as corporate downgrades in the mainland surged to 52 in the first seven months of the year, more than in the last six years combined, according to Chengxin. Mining and metal companies face 259 billion yuan (HK$328 billion) of bond payments by the end of next year just as industrial-profit growth has cooled to the least since December. That is more than the total amount due in the period on all corporate notes in Thailand, Malaysia and Singapore combined.

"The number of defaults in the corporate space will increase over the next six to 12 months," Christopher Lee, managing director of corporate ratings at S&P in Hong Kong, said in reference to payments on all financial obligations. That "would increase the risk premium for the bonds, and it could result in more selective lending and investments", he added.

The yield on top-rated corporate notes due in 10 years has risen 55 basis points this quarter to 5.68 per cent. The rate on similar-maturity government bonds climbed 55 basis points to 4.07 per cent.

The amount of outstanding corporate bonds in China, excluding quasi-sovereign paper and financial notes, rose to about 5.1 trillion yuan as of the end of last month, up from 800 billion yuan in 2007, according to Deutsche Bank. A total of 29 Chinese firms, including PetroChina and Datang International Power Generation, are among the world's 500 biggest long-term borrowers, up from nine in 2008.

There have been no defaults in the publicly traded domestic debt market since the central bank started regulating it in 1997, according to Moody's.

Concerns have mounted since the biggest unit of Sun- tech Power went into bankruptcy in March after defaulting on US$541 million of offshore bonds. The next month, LDK Solar failed to fully repay US$23.8 million in US dollar-denominated securities.

"We will see further deterioration in financial strength this year, because the debt level is very high [and] that would mean cash flow payback of debt is going to be even weaker," Lee said.