Wave of ratings downgrades for mainland firms

Record number of borrowers suffer the fate this year, with worst to come amid shake-out in debt market as economy slows, analysts say

PUBLISHED : Tuesday, 10 June, 2014, 1:02am
UPDATED : Tuesday, 10 June, 2014, 1:02am

Mainland companies suffered a record number of debt-rating cuts this year and the nation's second-biggest brokerage says the worst is yet to come.

"The economy's fundamentals are deteriorating, and there will be a wave of downgrades in June and July," said Li Ning, a bond analyst at Haitong Securities in Shanghai.

"Even though the government has announced measures to support the economy, they won't take effect soon."

A total of 17 borrowers were downgraded in the first five months, the most since at least 2009, up from 13 a year earlier, data compiled by China Investment Securities shows.

The yield on the 2019 bond sold by Lingyuan Iron & Steel has jumped 12 basis points to 9.06 per cent since China Chengxin Securities Rating lowered its score to AA-minus from AA on May 15.

The mainland's banking regulator last week said authorities would lower corporate borrowing costs by expanding loans, pumping cash into money markets and adjusting reserve requirements, as analysts forecast the weakest economic expansion in 24 years.

Mainland companies have 7.1 trillion yuan (HK$8.8 trillion) of bonds maturing in 2014, compared with 6.4 trillion yuan last year.

In addition to the downgrades, 20 companies' outlooks were cut from January to May, compared with 15 in the same period last year, according to China Investment Securities. Most downgrades occurred in the mechanical equipment industry, followed by electrical equipment and nonferrous metals.

The ratio of upgrades to downgrades by China Lianhe Credit Rating this year was 2.14, falling from 2.53 in 2013.

Yang Kun, an analyst at brokerage Guotai Junan Securities, said the "downgrade wave" started in April. There were seven rating cuts in that month and May, compared with a total of three in the previous three months, according to China Investment Securities data.

"There will probably be a substantial increase in the number of downgrades this year," Yang said. "The financial fundamentals of Chinese companies, especially cyclical companies, have been worsening since the first half of 2011.

"It's not surprising many companies will be downgraded following three years of worsening performance."

Mainland-listed companies, excluding financial institutions, have taken on more debt relative to their assets since the global financial crisis. Their average debt-to-asset ratio climbed to 62.5 per cent last year from 60.2 per cent in 2010, according to data compiled by Guotai Junan.

Zhu Haibin, Hong Kong-based chief China economist at JP Morgan Chase, said credit quality was worst in the property industry and industries with overcapacity, such as mining and steel.

"Chinese companies' credit quality will deteriorate in the coming years," Zhu said.

"The economy's growth will decelerate. We have seen lower company earnings and rates of return on investment."

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