Healthcare Bond Sales Double in Remedy for China Default Panic

Updated on
  • Industry offers 64.8 billion yuan of new notes so far in 2016
  • ‘Ironic’ that debt low as banks favored other sectors: Natixis

China’s healthcare bonds are offering a remedy for the default panic that caused issuers in other industries to scrap offerings.

China's Debt Bomb

Chinese drug or medical care companies sold 64.8 billion yuan ($9.67 billion) of notes onshore this year, up 153 percent from 25.6 billion yuan in the year-earlier period. Healthcare companies have a less than 0.4 percent probability of missing debt payments in the next 12 months, the lowest among all non-financial firms listed in Shanghai and Shenzhen, according to the Bloomberg Default Risk model that tracks metrics including share performance, liabilities and cash flow.

Overall corporate bond issuance stagnated last quarter as companies pulled more than 200 billion yuan of planned sales and a slowing economy made it harder for borrowers in industries with overcapacity such as metals and energy to refinance. Health companies, long ignored by state banks focused on supporting traditional employers, are now gaining from a government effort to transition to a service-driven economy, according to Iris Pang, senior economist at Natixis SA in Hong Kong.

"Profit margins will continue to be high because demand for healthcare and wellness products is rising in China due to the rising middle-income class," she said. "It is quite ironic" that the sector is now more financially healthy, she added. "It’s because banks are used to lending first of all to state-owned enterprises and then real estate, so they lend very little to these new sectors."

A Natixis study of the 3000 biggest publicly traded companies in China and the world found "strong repayment ability" in the nation’s healthcare sector. Total liabilities in the industry were 49 percent of common equity versus the global average of 117 percent. The profit margin of wellness companies averaged 12 percent versus 8 percent worldwide, leaving ample funds to cover interest expenses, the May report showed.

Healthcare firms have enjoyed lower borrowing costs than smokestack issuers. Yunnan Baiyao Holding Co., a AAA rated maker of herbal remedies, issued 270-day bonds at 2.95 percent on June 24. That compared with the 5.5 percent yield for AAA rated steelmaker Shandong Iron & Steel Group Co.’s similar-maturity notes sold the same day. The average coupon rate for healthcare bonds sold in 2016 dropped to 3.07 percent, from 5.41 percent in the same period of 2015.

In the secondary market, the yield on Kangmei Pharmaceutical Co.’s 2016 bond dropped to 2.94 percent, from 3.02 percent on March 31, according to a valuation compiled by Chinabond. That on Yunnan Baiyao Holding Co.’s 2019 note declined to 3.06 percent, from 3.18 percent.

Safety Appeal

"The yield is quite low too, so they might be less appealing to those expecting high returns," said Mao Qijing, a manager at China Chengxin Credit Rating’s corporate finance department.

For investors looking for safety over returns, the sector’s earnings offer comfort. The average profit margin among the 211 health and wellness companies listed in Shanghai and Shenzhen stood at 10.6 percent in the most-recent quarter, according to data compiled by Bloomberg. More than 20 firms have margins higher than 30 percent.

The pharmaceutical sector "has relatively more listed companies whose financials aren’t bad, so from the perspective of safety of capital it’s good," said Li Ji, an investment manager at Wuhan-based Changjiang Securities Co., adding that mutual funds and banks may be the most interested.

Chinese drugmakers have a stronger cash flow than companies in many other sectors, because there is virtually no risk in collecting payments from public hospitals that sell the majority of medicines in China, according to Wu Bin, a pharmaceutical analyst at Founder Securities Co.

Health sector bonds "are surely better compared to other sectors because there are default risks in other industries, and defaults in the healthcare and pharma sector are rare," Wu said.

— With assistance by Yuling Yang, Hui Li, and Judy Chen

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