ChemChina $50 Billion Loans Flag New Chapter in China Debt Binge

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CHINA-SWITZERLAND-CHEMCHINA-SYNGENTA-TAKE OVER

A China National Chemical Corp., also known as ChemChina, building in Beijing.

Photographer: Fred Dufour/AFP via Getty Images
  • `China should act now to solve the SOE debt problem:' SocGen
  • Beijing Enterprises, China Cinda also borrow for overseas M&A

Just as Moody’s Investors Service warns of the strain on China’s finances of debt among state-owned enterprises, the companies are loading up on record overseas loans to buy assets around the world.

China National Chemical Corp., or ChemChina, got $50 billion in such financing for its $43 billion purchase of Swiss pesticides producer Syngenta AG, including $35 billion that’s being or will be syndicated offshore, people familiar with the matter have said. That brings loans syndicated offshore for Chinese firms undertaking acquisitions, including those in the pipeline, to at least $36.3 billion this year, compared with the record $23.3 billion completed in 2015.

QuickTake China's Debt Bomb

Moody’s cut China’s rating outlook to negative from stable last week, saying state-sector leverage raises risks of a worse slowdown in economic growth as funds are diverted to service debt. Among the 38 SOEs with lowered outlooks were conglomerate CITIC Ltd., plagued by overruns in an Australian mining project, and Bright Food Group Co., which bought British cereal maker Weetabix Ltd. in 2012 and whose total debt was 137 percent of equity at end-2014. 

“Some of the SOEs only focus on growth right now without paying close attention to their balance sheet,” said Xia Le, chief economist for Asia at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “There will be risks for debt investors down the road. The huge amount of offshore loans the SOEs are taking on right now will make them vulnerable to changes in macro conditions and their own operations.”

Chinese companies have announced $72.6 billion of offshore acquisitions valued at $1 billion or more this year, compared with $73.6 billion in all of 2015, according to Bloomberg-compiled data. SOEs have seen debt jump to 62 percent of assets from 55 percent in 2007, according to estimates from Shi Kang, an associate economics professor at the Chinese University of Hong Kong.

Chinese companies are “horrendously over-levered" and “not all of them are starting from a balance sheet that, under normal circumstances, would allow them to make such large acquisitions,” said Kalai Pillay, head of North Asia industrial ratings at Fitch Ratings in Singapore.

Zombie Companies

“The SOE outlook change could serve to focus investors’ attention on the standalone credit profiles of the SOEs,” Nicholas Yap, a credit analyst at Mitsubishi UFJ Securities HK Ltd. in Hong Kong, wrote in a Friday report.

The National People’s Congress is meeting to lay out economic development targets, after authorities said in September they would reform “zombie enterprises.”

"We will address the issue of ‘zombie enterprises’ proactively yet prudently by using measures such as mergers, reorganizations, debt restructurings and bankruptcy liquidations," Premier Li Keqiang said in a work report delivered Saturday at the start of the annual NPC in Beijing.

China’s Baoding Tianwei Group Co., which last year became the first SOE to renege on onshore bonds, failed to repay 1.06 billion yuan ($162.7 million) in bond payments due last month.

Defaults by Chinese companies abroad have been limited. Guangdong International Trust and Investment Corp., the finance arm of Guangdong province, was shuttered in 1998 after being unable to pay nearly $2 billion in overseas debt. Kaisa Group Holdings Ltd., a private-sector firm, last year became the first Chinese developer to renege on dollar bonds.

Debt Burden

China’s overall external debt burden has been declining. Companies are unwinding dollar liabilities as the yuan weakens, with total foreign-currency debt dropping by about $140 billion in the second half of 2015 to $1.69 trillion, including corporate borrowing from onshore banks, Goldman Sachs Group Inc. wrote in a Jan. 26 note. The yuan has weakened 3.8 percent in the past year.

ChemChina had total debt of 156.5 billion yuan as of Sept. 30, exceeding cash and cash equivalents of 29.8 billion yuan, Bloomberg-compiled data show. Its total debt was 260 percent of equity, compared to the median ratio of 52.8 percent for Shanghai and Shenzhen-listed non-financial firms.

Two calls to ChemChina went unanswered Friday.

Beijing Enterprises Holdings Ltd. is borrowing at least 1.4 billion euros ($1.5 billion) to acquire Germany’s EEW Energy, people familiar with the matter said last month. Two calls to the firm Friday after office hours went unanswered.

Overcapacity Industries

China Cinda Asset Management Co. assigned a bank to coordinate a $5 billion loan to buy Hong Kong’s Nanyang Commercial Bank Ltd., people familiar said in February. Calls to the company Friday went unanswered after office hours.  

“SOEs in overcapacity industries, such as coal or steel, are facing high debt pressure and shouldn’t borrow more for expansion,” said Zhou Hao, an economist at Commerzbank AG in Singapore.

State-backed Zoomlion Heavy Industry Science and Technology Co. earlier this year made an unsolicited takeover bid for Terex Corp., the U.S. construction machinery maker. Zoomlion, rated junk by Standard & Poor’s, had total debt of 42.4 billion yuan as of end of September, compared to cash of 29 billion yuan. Its total debt was 105 percent of equity.

“China should act now to solve the SOE debt problem by restructuring their debt and weeding out zombie companies,” said Yao Wei, chief China economist at Societe Generale SA. “Borrowing money itself is not a problem. Where the money will be spent is more important.” 

— With assistance by Lianting Tu, and Judy Chen

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