Buffett-Backed BYD Plans Most Bonds as Costs Surge: China Credit
Sept. 19 (Bloomberg) -- BYD Co., the Chinese automaker part-owned by Warren Buffett’s Berkshire Hathaway Inc., may have to sell a record amount of bonds to pay off maturing debt next year just as the government’s inflation-fighting campaign pushes corporate borrowing costs to a high.
Shareholders gave approval on Sept. 9 for BYD to sell as much as 6 billion yuan ($939 million) of bonds with a maturity no longer than 10 years. Yields on its 1 billion yuan of bonds due 2014 have surged 450 basis points to 8.89 percent since they were sold in April, according to Royal Bank of Scotland Group Plc prices. Average yields on U.S. automakers’ debt were at 2.86 percent on Sept. 15, Bank of America Merrill Lynch indexes show.
Vehicle sales at the Shenzhen-based company fell every month in the past year to July as the popularity of its best- selling F3 sedan model waned and General Motors Co. (GM) and Honda Motor Co. released new cars. Credit limits aimed at curbing price growth have raised average yields on five-year corporate bonds rated A+ by 130 basis points to a record 8.65 percent, according to Chinabond, the nation’s biggest clearing house.
“It’s a real bad time for BYD to sell bonds when the company is surrounded by uncertainties,” said Charlene Gu, a Hong Kong-based analyst at Yuanta Securities HK Co. “Investors will ask for higher returns on the bond and it will in turn further squeeze the automaker’s profit margin.”
BYD, whose first-half profit plunged 89 percent, is raising funds through various channels this year. The company got 1.42 billion yuan from a share sale in Shenzhen, southern China, in June, 35 percent less than it had aimed for.
The automaker has 16 billion yuan of bonds and loans outstanding, with a 15 billion yuan term loan maturing next year, according to data compiled by Bloomberg. That’s five times the 3 billion yuan of bonds from Dongfeng Motor Group Co. maturing next year. Dongfeng operates ventures with Nissan Motor Co. and Honda in China.
BYD will choose a suitable time over the next two years to issue the debt, and will take into consideration the economic and bond market situation, Li Qian, the BYD board secretary, said in a phone interview on Sept. 15. The company may sell the bonds in batches, Li said.
“Financing costs have been rising,” Li said. “We will sell the bonds at a cost that is acceptable to us.” The proceeds will be used to repay bank loans and bolster working capital, he said.
MidAmerican Energy Holdings Co., a unit of Berkshire Hathaway Inc., bought 9.9 percent of BYD in September 2008.
China’s gross domestic product grew 9.5 percent in the second quarter from a year earlier, after climbing 9.7 percent in the first three months. Economic growth may slow to 9 percent in both the third and fourth quarters of this year, according to the median of 10 economists surveyed by Bloomberg.
Inflation in China eased in August to 6.2 percent from a three-year high of 6.5 percent in July. The People’s Bank of China has raised borrowing costs five times since mid-October 2010 to reduce prices, with the latest increase in July lifting the benchmark one-year rate to 6.56 percent.
Premier Wen Jiabao said this month the slowdown is within expectations and that fighting inflation is still the top priority even as he acknowledged increasing risks to the global recovery as the U.S. economy falters and the European debt crisis continues.
The yield on China’s 10-year government bonds rose one basis point, or 0.01 percentage point, to 4.060 percent on Sept. 16. The yuan strengthened 0.13 percent to 6.3834 per dollar in Shanghai on Sept. 16, the most in a week, according to the China Foreign Exchange Trade System.
‘Hit Rock Bottom’
The extra yield investors demand to own BYD’s yuan bonds due April 2014 rather than similar-maturity Chinese government securities rose to a record 359 basis points on Sept. 15, according to data compiled by Bloomberg. Yield premiums on U.S. automaker debt over U.S. Treasuries were unchanged at 193 basis points on Sept 15, according to Bank of America Merrill Lynch’s U.S. Automative Index, which includes bonds from Honda, Nissan and Toyota Motor Co.
“BYD has hit the rock bottom and may not come out of it in the near term,” George Yin, Beijing-based analyst at BOCOM International Holding, said in a phone interview on Sept. 16. “If they have to raise funds through bond sales in the coming months they will have to offer higher returns.”
Five year credit-default swaps insuring China’s sovereign debt against default fell three basis points to 126 basis points on Sept. 16, down from a two-year high of 131 reached on Sept. 12, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
China’s government phased out buying incentives on automobiles and imposed purchase restrictions to curb congestion. The changes hurt BYD, which had models that were subsidized by the government under the stimulus policies. General Motors, Honda and Toyota introduced price discounts to offset slowing sales in the world’s largest vehicle market, according to GM and J.D. Power & Associates.
Liuzhou-based SAIC-GM-Wuling Automotive Co., GM’s minivan venture with SAIC Motor Corp., introduced discounts for its minivans starting May and also rolled out a new China-only sedan, the Baojun 630, to cater to entry-level buyers in August.
Japanese automakers offered incentives starting in July after losing market share in the second quarter, Marvin Zhu, a J.D. Power analyst, said in an Aug. 23 note. Other carmakers responded with discounts of their own, Zhu said. Vehicle sales in China are forecast to slow this year, after climbing 32 percent in 2010 after sales-tax breaks and rebates for rural buyers ended in January and following central bank interest-rate rises.
“BYD may have negative year-on-year vehicle sales as they lack popular models to revive growth,” Harry Chen, a Shenzhen- based analyst at Guotai Junan Securities Co., said in a phone interview on Sept. 16. “BYD is facing huge pressure in their operations and have tight capital supplies. Fund-raising costs are very high at the moment but they will have to accept it if they are in urgent need of capital.”
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