Lending Curbs Help Propel Commercial Paper Yields to Record: China Credit

Companies in China face record interest rates on short-term debt as curbs on lending force them to rely on commercial paper to pay back loans.

The average yield on top-rated, one-year corporate notes has risen 101 basis points since June 30 to 5.9 percent, and is poised for the biggest quarterly increase in Chinabond data going back to 2007. China Yangtze Power Co. sold 6.5 billion yuan ($1.02 billion) of one-year debt at a coupon of 6.04 percent on Sept. 8, the first time a AAA rated company paid more than 6 percent on short-term securities, according to China International Capital Corp.

The People’s Bank of China has raised borrowing costs five times since mid-October 2010 to curb inflation in the world’s fastest-growing major economy, with the latest increase in July lifting the benchmark one-year rate to 6.56 percent. The average coupon on one-year, AAA rated Indian company debt fell 14 basis points to 9.49 percent this quarter, while funding costs rose 1 basis point to 0.5 percent for similar-maturity notes in the U.S., according to data compiled by Bloomberg.

High yields reflect “the market concern about liquidity and also the view that monetary policy may not change in the short-term,” said George Weisi Tan, who oversees about 300 million yuan as head of bond investments at Fortune SGAM Fund Management Co. in Shanghai. “It’s hard to get a loan from the bank these days.”

Commercial Paper Sales

Loan quotas and higher reserve requirements are reducing access to bank credit, helping push sales of commercial paper to 552 billion yuan this year, Bloomberg data show. Sales are poised for the busiest first three quarters of the year on record, according to Bloomberg data. Offerings of longer- maturity corporate bonds are down 33 percent to 71.4 billion yuan this quarter compared with the same period last year, the data show.

Yields for longer-term bonds aren’t high enough to compensate for investors for the risk, so companies have issued more short-term debt, Tan said.

Beijing-based China Yangtze, rated AAA by China Chengxin International Credit Rating Co., has 14 billion yuan of commercial paper outstanding, Bloomberg data show.

The company, which generates electricity at the world’s largest hydropower dam, will use proceeds from the bond sale to pay back bank loans, according to documents governing the offering. It has to repay 31 billion yuan of debt in 2011 as of August and had 49.7 billion yuan of bank loans as of March, the document shows.

‘Greater Pressure’

China Yangtze’s “financing costs are markedly going up, and there is greater pressure to pay back debt,” according to the prospectus. Two calls to the company’s main number seeking comment on the effects of increasing commercial paper rates on company financing plans went unanswered.

China Power Investment Corp. also paid a 6.04 percent coupon when it sold 5.8 billion yuan of one-year bonds on Sept. 13, Bloomberg data show. The state-owned electricity generator uses proceeds from debt sales to pay back loans, it said in the prospectus.

The company, which has the top ranking from Chengxin, had total short-term borrowings of 20.3 billion yuan as of March, it said. Its debt-to-asset ratio was 85 percent at March 31 with 27 percent of its borrowings short-term, according to the document. Two calls to the Treasury Department of China Power seeking comment on the increase in borrowing costs were unanswered.

Monetary Tightening

Chinese inflation, which slowed to 6.2 percent in August, from a three-year high of 6.5 percent, must be stemmed even as the global economy slows, Premier Wen Jiabao said Sept. 14. Monetary tightening has helped temper growth, with the economy expanding 9.5 percent last quarter, the least since 2009.

“Credit risks will increase if the economy slows,”said Xide Ma, a Beijing-based fund manager at E Fund Monthly Income Fund. “There are a lot of companies getting financing and weak demand so yields are going up. Loans are also tight.”

Yields on Shandong Helon Co.’s 400 billion yuan of 5.8 percent one-year notes rose to a record 8.94 percent on Sept. 19 after the company’s credit rating was downgraded, Chinabond prices show.

China Lianhe Credit Rating Co. cut the Weifang city, eastern China-based fabric maker’s ranking on Sept. 15 to A-from A+ with a “negative” outlook, citing high debt and management irregularities. Lianhe also said rising costs of raw materials contributed to the downgrade.

Cash Flow

Shandong Helon sold the bonds in April to lower its cost of capital, according to the prospectus. The company has borrowed from all of China’s major banks, including a 5.84 percent one- year loan from Agricultural Bank of China Ltd., it said in the prospectus. A person who answered the phone at the finance department of the company declined to comment on the company’s downgrade. The person referred questions to company officials, without providing contact details.

Operating cash flow at Chinese-listed companies fell 6 percent in the first half from a year earlier, Credit Suisse Group AG analyst Peggy Chan wrote in a Sept. 5 report.

“Historically, operating cash flow has never been good in China and has deteriorated since 2010,” she wrote.

Banks are demanding near-record interest rates to lend to one another for six months or more, Shanghai interbank rates show. The Shibor rate on six-month yuan loans was at 5.2979 as of 11:30 a.m. local time, after reaching 5.3093 percent on July 14, the highest level since the daily fixing was introduced in October 2006. The equivalent cost to borrow dollars in London was 0.527 yesterday.

Yuan Advance

The yuan advanced to the strongest level in three weeks on signs policy makers will tolerate currency gains to fight inflation. It strengthened 0.1 percent to 6.3776 per dollar as of 9:54 a.m. in Shanghai, according to the China Foreign Exchange Trade System. The currency has advanced 3.59 percent versus the dollar in 2011, while India’s rupee dropped 6.8 percent, Russia’s ruble fell 2.67 percent and the Brazilian real slumped 6.96 percent.

The yield on China’s benchmark 10-year bonds has risen 19 basis points since June 30 to 4.08 percent on Sept. 20. That’s 213 basis points more than the rate for similar-maturity U.S. Treasuries.

Five-year credit-default swaps on China’s sovereign bonds rose 53 basis points this quarter to 137 basis points yesterday, the highest since April 2009, 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.

“Funds are very tight at the moment so demand for short- term bonds has fallen causing the issuance coupon to go up,” said Ouyang Kai, a fund manager at ICBC Credit Suisse Asset Management Co. in Beijing. “But loan rates are still higher than selling short-term bonds.”

--Henry Sanderson. Editors: Edward Johnson, Shelley Smith

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

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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