BMW Dealer Sweetens Bonds Amid $1.9 Trillion Debt: China Credit
China ZhengTong Auto Services Holdings Ltd. (1728), the luxury car dealer that scrapped a bond last year, is planning to sell credit-enhanced notes as concern grows about Chinese companies’ $1.9 trillion of debt.
The seller of sedans made by Bayerische Motoren Werke AG (BMW) and Tata Motors Ltd. (TTMT)’s Land Rover is talking to investors about an offering of U.S. dollar-denominated securities backed by Bank of China Ltd. to refinance loans due this year. Chinese and Hong Kong borrowers’ total debt has almost doubled since 2009, a Bloomberg search of the latest filings shows.
The country’s issuers, struggling with falling profits and mounting obligations amid the longest streak of sub-8 percent economic growth in at least two decades, are less able to service debt than a year ago, according to Standard & Poor’s. Yields on dollar bonds sold by Chinese companies have risen 99 basis points in 2013 to 6.26 percent, according to Bank of America Merrill Lynch indexes. Corporate securities pay 3.19 percent globally.
“A lot of companies need to come to the market,” said Kaushik Rudra, the global head of credit research in Singapore at Standard Chartered Plc. “They’ll probably be looking at structures to attract a bigger audience and find more support for their names.”
Borrowing by Chinese corporates will probably exceed that of U.S. peers within the next two years, S&P wrote in a report in May. Companies from the world’s second-largest economy will need more than $8 trillion for refinancing during the five years ending 2017, accounting for half of such needs in the Asia-Pacific region, S&P said in the report.
More than 50 percent of dollar bonds sold by Chinese or Hong Kong companies last quarter were slated to repay debt, according to data compiled by Bloomberg, stock exchange filings and marketing materials. That compares with at least 37 percent last year.
Chinese corporates boosted sales of credit-enhanced notes, which carry pledges of support from banks or companies, to the highest since April last month, data compiled by Bloomberg show. Keepwell agreements, which state that a China-based parent will maintain the issuer’s solvency, were used to sell $650 million of bonds in August.
Financing costs are rising while nonpayment concerns expand as Beijing moves to rebalance growth from smokestack to consumer industries. President Xi Jinping said this week that the government has opted for slower growth to allow it to adjust the structure of the nation’s economy, as it targets 7.5 percent expansion in 2013, down from 7.7 percent last year.
Hidili Industry International Development Ltd. (1393), a coal miner, in August reported financing costs of 261.3 million yuan ($43 million) for the first half, contributing to a 269.2 million yuan loss in the period. Winsway Coking Coal Holdings Ltd. (1733), a Chinese importer of fuel for steel making, is offering to buy back bonds due 2016 at as little as 32.5 percent of the bonds’ value at issue, citing possible repayment difficulties.
LDK Solar Co. said yesterday it is in talks with noteholders of its 2014 securities to delay interest payments that were due on Aug. 28. Suntech Power Holdings Co. is also attempting to renegotiate obligations.
“There was insufficient differentiation” among industrial issuers by investors, said Tim Jagger, a portfolio manager at Aviva Investors Asia Pte. “They all seemed to come in a bunch rather than people thinking about where the credits deserved to be priced. Investors learned their lesson the hard way which is now why industrial companies coming to market get more scrutiny.”
Yields on top-rated 10-year corporate debt onshore have surged 54 basis points this quarter to 5.67 percent, Chinabond indexes show. Similar-maturity government debt yields 4.06 percent. The premium on company notes is at 161 basis points, near the three-month high it marked last week at 168.
China’s credit-default swap contracts insuring the nation’s debt against non-payment have risen 28 basis points this year to 94.5 basis points, according to data provider CMA. The yuan was little changed at 6.1202 per dollar in Shanghai at 3:11 p.m.
ZhengTong Auto plans to use proceeds from any bond sale to refinance portions of a HK$930 million ($120 million) loan, a $50 million agreement and a greenshoe facility of up to $200 million that mature in November, the company said in a statement to the Hong Kong stock exchange this week. Its share price has fallen 6.7 percent this year to HK$5.03 as of 10:10 a.m. in Hong Kong.
It secured the loans last year, after shelving a planned sale of five-year notes in May. That bond was slated to repay about $315 million in loans due to mature in 2012, before yields soared on concerns Greece would exit the euro, prompting the company to cancel the offering.
The car dealer marketed the bonds in the high 11 percent area before they were scrapped, a person familiar with the matter said at the time. Moody’s Investors Service gave those notes a provisional Ba3 rating, three steps below investment grade. In contrast the new bonds benefit from an irrevocable and unconditional standby letter of credit from Bank of China’s Macau branch and have a preliminary A1 rank, in line with the lender’s rating.
Citic Securities Co., which also secured a letter of credit from Bank of China, priced bonds to yield 2.553 percent in April, data compiled by Bloomberg show. Such letters may become more common, according to Nomura Holdings Inc.
“For companies that can’t issue a bond or can only issue a bond at a high cost on a standalone basis, they may try to print with a credit enhancement,” said Annisa Lee, a Hong Kong-based analyst at Nomura. “It should lower the cost a lot.”
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