Chalco to Favor Bonds Over Loans After Market Rates Double: China Credit

Aluminum Corp. of China Ltd., the nation’s biggest producer of the metal, is increasing bond sales to fund expansion after China’s market rates for loans doubled in a year.

Chalco, as the Beijing-based company is known, may more than double its short- and medium-term debt to 47 billion yuan ($7.1 billion) by June 2012, company filings show. While the three-month Shanghai interbank offered rate for loans jumped to 4.17 percent from 1.84 percent a year ago, the average yield on similar-maturity AAA grade commercial paper was last at 3.42 percent, according to data compiled by Bloomberg.

“The financing cost of selling securities on China’s interbank market is lower than commercial bank loans,” Lu Dongliang, Chalco’s deputy general manager of financing, said in a Jan. 6 interview. “We plan to issue both short-term paper and longer-term bills to improve our debt structure.”

Money markets are signaling China’s central bank will raise interest rates by as much as 100 basis points, or 1 percentage point, this year after banks added 7.95 trillion yuan of new loans in 2010, exceeding a government target intended to prevent overheating in property prices. Sales of three- to five-year bonds jumped to 1.4 trillion yuan last year from 167 billion yuan in 2008, when China started a medium-term note market to wean non-financial companies off loans, according to data compiled by UBS AG.

Financing Avenues

China will speed up development of its corporate bond market, the state-run Xinhua news agency reported on Dec. 30, citing China Securities Regulatory Commission Chairman Shang Fulin. Chinese banks’ borrowing costs will rise to the highest level in more than two years in the first quarter as policymakers curb supplies of cash to fight inflation, according to a Bloomberg survey of eight bond analysts on Jan 6.

Chalco’s ability to raise money from equity diminished after its shares fell 34 percent to 10.18 yuan in Shanghai over the past 12 months. Chief Executive Officer Xiong Weiping, 54, increased spending 36 percent to 14.6 billion yuan, adding coal mines in northern China and an iron-ore project in Guinea with partner Rio Tinto Group.

Xiong said in August that he plans to diversify into coal, iron ore and rare earths as higher fuel costs and aluminum overcapacity in China, the world’s biggest metals consumer, reduce margins. The company posted a loss of 118 million yuan in the quarter ended Sept. 30.

“The financing cost of seeking bank loans is higher, and Chalco is unable to raise money through the stock market now as most investors are not optimistic about the aluminum industry and Chalco’s profit prospects,” said Owen Liang, a Shenzhen- based analyst at Guotai Junan Securities Co.

Top Rating

Chalco has the top AAA local-currency issuer rating from China Chengxin International Credit Rating Co., according to data compiled by Bloomberg. It has 24 billion yuan of bonds and loans due to mature through 2017, the data show, including 15 billion yuan this year.

The yield on the company’s 5 billion yuan of 4.58 percent notes due in 2013 slid to 4.25 percent from 4.45 percent on Nov. 26, according to Chinabond. The extra yield investors demand to own the bonds instead of similar-maturity government debt narrowed to 98 basis points from 127 in the period, Chinabond prices show.

“On the one hand companies can reduce their cost of capital by issuing bonds, and on the other hand they can improve their debt structure,” said Guo Jun, who helps oversee about 190 billion yuan at Bosera Fund Management Co., the nation’s fourth-largest asset-management firm. “In the current market investors are even more willing than before to buy good quality company debt with not a bad yield.”

Sovereign Yields

From a risk point of view, selling bonds is better for the company than overreliance on bank loans, he said. It also makes it easier to issue follow-on debt. For investors, commercial paper yields about 4 percent, offering better value than government debt, he said.

The yield on China’s 3.77 percent government bond due in December 2020 rose two basis points to 3.88 percent, according o Chinabond. China’s 2.33 percent sovereign note due in June 2013 yielded 3.22 percent, compared with 8.2 percent for India’s three-year bond, 7.1 percent for Russia’s and 12.81 percent for Brazil’s.

The cost of protecting China’s government debt from non- payment for five years fell almost 3 basis points yesterday to 74, up from a 2 1/2-year low of 52 on Oct. 13, according to CMA prices in New York. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Currency Appreciation

The yuan traded close to a 17-year high after the U.S. made renewed calls for China to let its currency rise before President Hu Jintao’s visit to Washington next week.

China’s central bank set the reference rate at 6.5997 per dollar, 0.2 percent stronger than yesterday and the highest level since at least July 2005. The yuan hit a high of 6.5931 per dollar, near 6.5897 reached on Dec. 31, the strongest level since 1993. The rate slipped 0.01 percent at today’s close of 4:30 p.m. compared with yesterday’s 6.6038, according to the China Foreign Exchange Trade System in Shanghai.

Twelve-month non-deliverable forwards rose for the fourth day, by 0.03 percent to 6.4377, reflecting bets the currency will gain 2.4 percent in a year.

The seven-day repurchase rate, which measures lending costs between banks, slipped 14 basis points to 2.35 percent after reaching a high of 6.34 percent on Dec. 31, according to daily fixings published by the National Interbank Funding Center. The one-year interest-rate swap, the fixed cost to receive floating payments, climbed three basis points to 3.20 percent as of 12:54 p.m. in Shanghai.

Chinese companies may increase sales of commercial paper by 20 percent to about 820 billion yuan this year as the government clamps down on bank loans, according to Guo Caomin, a bond analyst at Industrial Bank Co. in Shanghai, the eighth-biggest underwriter of the securities in 2010.

China added a new class of commercial paper last month with maturities of up to 270 days, and approved the sale of 210 billion yuan of such notes in 2011, according to the National Association of Financial Market Institutional Investors.

--Xiao Yu, Henry Sanderson. With assistance from Sonja Cheung in Beijing and Tom Kohn in Hong Kong. Editors: Patrick Chu, Will McSheehy

To contact Bloomberg News staff on this story: Xiao Yu in Beijing at +86-10-6649-7564 or yxiao@bloomberg.net Henry Sanderson in Beijing at 86-10-6649-7548 or hsanderson@bloomberg.net

To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net

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