China's Top Arranger Sees More Bonds as Cure for Debt Hangover

  • China Securities Co. sees at least 30% increase in 2016 sales
  • The country's firms sold 7.9 trillion yuan of bonds in 2015

China’s top underwriter said regulators will encourage more bond sales this year because cutting off financing isn’t the right solution to the nation’s debt hangover.

As the slowing economy cuts earnings, companies increasingly need fresh note offerings to pay off old obligations, according to China Securities Co., the top arranger of bond offerings from state-owned and listed firms. It forecasts issuance of corporate notes will jump at least 30 percent in 2016 to top 10 trillion yuan ($1.54 trillion), more than the annual economic output of Spain.

“It’s urgent to solve some companies’ liquidity problems, as profitability has worsened given the slowing economy,” said Ji Weijie, a bond analyst at Beijing-based China Securities. “If they can’t roll over their debt, there may be bigger default risks or even systemic risks.”

2016 Repayments

The government has allowed property companies to tap the onshore bond market and lowered the threshold for local government financing arms to sell notes, as at least seven companies reneged on obligations in 2015 amid the worst economic slowdown in a quarter century. Firms must repay about 4.18 trillion yuan of bonds this year, the second highest after an unprecedented 4.19 trillion yuan matured in 2015, according to data compiled by Bloomberg.

China Merchants Bank Co., the top underwriter of short-term notes, sees a 20 percent increase in non-financial companies’ bond sales. There was no immediate reply from Industrial & Commercial Bank of China Ltd., the leading manager in the whole corporate bond market, to questions on 2016 bond issuance forecasts.

The central bank’s six interest-rate cuts since November 2014 have driven bond yields down to levels unseen since 2006. The yield on five-year corporate bonds that carry top credit scores from local assessors dropped 150 basis points last year to 3.30 percent as of Dec. 30, according to Chinabond data. The notes’ yield premium over similar-maturity government bonds has narrowed to a record low of 60 basis points.

“Loose monetary policy has helped cut bond yields, which is strongly motivating Chinese companies to reduce borrowing costs via bond sales,” said Zheng Xinying, general manager of investment banking at China Merchants Bank in Shenzhen. “There’s no doubt that the loose monetary policy will be continued in 2016.”

Chinese companies sold 7.9 trillion yuan of notes in 2015, more than four times the 1.8 trillion yuan issued five years earlier, according to data compiled by Bloomberg. China Securities last year arranged 86.7 billion yuan of securities regulated by the National Development and Reform Commission and the China Securities Regulatory Commission. China Merchants Bank underwrote 119.1 billion yuan of commercial paper, notes with a term of one year or less.

Not every company has found it easy to sell debt. A total of 4.1 billion yuan of planned cement bond sales have been canceled since China Shanshui Cement Group Ltd. missed a debt payment in November, Haitong Securities Co. analysts led by Jiang Chao wrote in a report on Dec. 30.

Shanshui’s Shandong unit said it may fail to repay 1.8 billion yuan of bonds due Jan. 21 because of a capital shortage. Sinosteel Co., a state-owned steel trader, on Dec. 30 postponed a bond payment a fourth time.

“The steel, non-ferrous metals, coal, cement and chemicals industries may see smaller bond sales because investors are very worried about these sectors’ credit risks,” said China Securities’ Ji.

Rising Defaults

Chinese corporate defaults will likely spread in 2016, financial companies surveyed by Bloomberg said late last year. The number of listed companies with more debt than equity has jumped to 913 from 705 in 2007, according to data compiled by Bloomberg. Of the 22 fixed-income traders and analysts surveyed by Bloomberg, 15 reckon the bond rally that has so far lasted eight consecutive quarters will end by the middle of this year.

China Merchants Bank’s Zheng said in 2016 borrowers should take full advantage of low interest rates to sell more bonds with terms longer than five years. While he believes the rising defaults in 2016 won’t lead to any systemic risk, he said there are areas that need addressing.

“The investment cycles of Chinese firms are usually more than 10 or even 15 years, while few of their borrowings -- bank loans or bonds -- are longer than five years,” said Zheng. “That term mismatch is very risky.”

— With assistance by Xize Kang, Ling Zeng, and Judy Chen

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