China’s utilities, airlines most at risk from interbank rate rises
Highly debt leveraged Chinese companies in the utilities and airlines industries are among the most exposed to the risk of higher borrowing costs if the recent rise in interbank rates becomes a sustained trend, according to analysts.
However, any impact will depend on how long the latest round of increases in short term borrowing costs will persist, and there will be a time lag for higher short term loan costs and bond yields to be reflected in corporations’ real finance costs, they said.
“Utilities companies have generally locked in relatively attractive long term interest rates so the recent moderate increase in short term borrowing rates has no significant impact on their borrowing costs,” UBS head of Asian utilities research Simon Powell told the Post.
“The question is whether the ‘lower for longer’ assumption about interest rates is finally coming to an end ... so far the more immediate impact from rising bond yield is on sentiment toward high-yielding utilities stocks.”
He attributed the recent share price weakness of utilities stocks to the rate rise concerns, as the attractiveness of utilities’ high dividend yields are expected to be eroded by higher interest rates.
Power producers have some of the highest debt leverage burdens among mainland Chinese firms.
Huaneng Power International, the listed unit of the nation’s largest power producer China Huaneng Group, had a net debt-to-equity ratio of 140 per cent at the end of September, while that of fellow coal fired-focused generator Huadian Power International was 183 per cent at the end of June.
According to estimates by a BNP Paribas research report, a 25 basis point rise in its average interest expense would reduce Huaneng’s earnings by 1.4 per cent next year, and that of Huadian by 4.8 per cent.
The 10-year Shanghai interbank rate had risen 10 basis points to 3.15 per cent on Wednesday from 3.05 per cent on November 15.
State-backed utilities firms issue debt and bond instruments with a wide range of durations that carry significantly different finance costs.
For example, the interest cost to Huaneng on its 270-day “unsecured super short-term bonds” issued between March and May this year range from 2.48 per cent to 2.73 per cent, while a 10-year bond issued in 2007 bore an interest rate of 5.9 per cent.
Analysts said it will be some time before utilities firms feel the heat of higher borrowing costs.
“Utilities companies rely mostly on long term loans and bonds to finance their projects, so short term interbank rate volatilities generally do not have much impact on their financing costs, and even if interest rates are hiked, the impact is delayed as existing loans get refinanced,” said a head of regional utilities research at a European bank, who declined to be named due to company policy.
“What’s more, it is too early to say whether the recent interbank rates volatility will last this time … in mid 2013 the steep short term borrowing rates came down fairly quickly.”
Airlines are another group of companies more vulnerable to interest rate increases.
China Eastern Airlines’ net debt-to-shareholders equity ratio stood at 106 per cent at the end of June.
Some 46.7 per cent of its total interest-bearing liabilities are repayable within a year, and most of its long-term interest-bearing liabilities repayable in over one year carry floating interest rates, according to its interim report.
US dollar-denominated liabilities accounted for 41.4 per cent of its total interest-bearing liabilities, compared to 53.3 per cent for yuan-demoninated ones.