Chinese companies hit by credit squeeze as corporate debt costs surge
Chinese companies are reassessing whether to proceed with plans to tap the corporate bond market amid soaring debt costs
The cost of raising capital through the corporate bond market in China has exceeded that of bank lending for the first time since 2008, raising concerns that Beijing’s crackdown on financial leverage is starting to affect the real economy.
The development is unusual, but one that also adds up to a financial burden for companies that have tended to favour debt markets as offering more affordable financing.
Top rated five-year medium-term notes were sold in the onshore bond market at an average yield of 5.9744 per cent in the week of May 15 - 21, a jump of 125 basis points over the previous week, according to Wind data.
Meanwhile, the benchmark rate for a five-year loan at Chinese banks is 4.75 per cent. When factoring in a 25 per cent premium over the benchmark rate, bank loans still look cheaper than the corporate debt markets.
Companies are having to adapt to the rapidly changing financial environment following a month-long rout in the nation’s wholesale money market as regulators reiterated their intent to cut leverage in the financial market.
On Thursday, the one-year Shanghai Interbank Offered Rate (Shibor), an index of the wholesale funding market, was at 4.37 per cent, up from 4.28 per cent on April 18. Since May 23 the one-year Shibor rate has been above China’s prime lending rate of 4.3 per cent. Three-month Shibor was at 4.578 per cent on Thursday.
“The policy intention is to shed leverage within the financial industry, but as the market rate spikes and financial institutions feel their profit margin threatened, they could relay their pressure to the real economy and raise non-financial companies’ borrowing costs,” said Ming Ming, chief fixed-income analyst with Citic Securities.
A total of 70 billion yuan (US$10.29 billion) worth of corporate bonds have been delayed from issuance in May, according to Wind data.
So far this year, plans to raise 370 billion yuan worth of corporate debt have been shelved.
Wanda Group on March 8 sold a three-year AAA-rated medium-term note at 4.8 per cent, but during a subsequent debt sale on April 17 the company had to offer a 5.2 per cent coupon. Last October the company offer note with the same duration with a coupon of 3.4 per cent.
The financing squeeze is a particular burden to companies with a lower credit rating. Average coupons for AA-rated, three-year medium-term notes spiked to 7.125 per cent last week, a jump from 5.78 per cent the previous week.
Guilong, a logistic park operator in southwest Guizhou province, in late April sold its 5-year, AA-rated medium-term note at 7.8 per cent.