Ratings companies are warning of more Chinese bond defaults this year after a surge in profit warnings from the mainland.
Among the 1,247 listed firms that have posted earnings forecasts for the first half of this year, 204 predict losses, according to data compiled by China Investment Securities Co. That compares with 118 of such warnings for the whole of 2014.
Chinese companies, the world’s biggest corporate borrowers, are increasingly missing debt payments as the economy grows at the slowest pace since 2009. Three issuers defaulted on onshore notes in the first six months of this year after Shanghai Chaori Solar Energy Science & Technology Co. reneged first in 2014.
“We may see more onshore bond defaults in the second half because the economy remains weak and could decelerate further,” Wang Ying, an analyst at Fitch Ratings Ltd. in Shanghai, said on Thursday. “We haven’t seen a material cut in leverage by Chinese companies. Many are still burning free cash flow and leverage continues to increase.”
Chinese firms’ debt has surged since the global financial crisis, data compiled by Bloomberg show. The number of publicly traded non-financial companies with debt-to-equity ratios exceeding 200 percent has jumped by two thirds since 2007.
“Banks have been refraining from extending loans to those highly leveraged companies, which is worsening their credit profiles,” said Zhang Chao, a bond analyst at China Investment Securities in Shenzhen.
The People’s Bank of China has cut interest rates four times since November to help avert a slump in the economy. Even so, the stimulus measures won’t help lift companies’ profits in the second half of this year, said Ivan Chung, an analyst at Moody’s Investors Service, who also predicts a rising number of bond defaults between July and December.
“There won’t be a substantial improvement in earnings of companies, especially those in industries with overcapacity,” Chung said in a phone interview Thursday. Industries with the highest default risks are coal, steel, shipbuilding and commodity trading, he said.
Jiangsu Feida Holdings Group Co., a steel product maker, may default on a 2018 bond if it can’t get external financial support before Aug. 31, China International Capital Corp. said in a July 2 report. Pengyuan Credit Rating Co. cut its issuer rating to BBB+ from AA last month, citing capital constraints and a sluggish outlook for the steel industry.
The riskier outlook for companies is reflected by the average yield premium on three-year AA- corporate bonds over top rated notes, which has widened four basis points this month to 129, according to ChinaBond data.
Fitch and Moody’s said China will be able to avoid systemic risk even as bond defaults rise. China is capable of stabilizing market expectations and sustaining healthy economic development, Premier Li Keqiang said Thursday, according to a statement on the State Council’s website.
“Cyclical industries such as nonferrous metals and coal still face huge capital pressure,” said Li Qilin, a bond analyst at Minsheng Securities Co. in Beijing. “Their ratings may be downgraded or even have defaults.”
— With assistance by Judy Chen