First China Default Seen as Record $427 Billion Debt Due
Chinese company debt twice the size of Ireland’s economy will come due in 2014, spurring concern the nation is on the cusp of its first corporate bond default.
A record 2.6 trillion yuan ($427 billion) of interest and principal on securities issued by non-financial companies must be repaid next year, 19 percent more than this year and the most since China International Capital Corp. began compiling the data in 2008. Ten-year AAA corporate bond yields surged 89 basis points since Dec. 31 to 6.18 percent, touching a record 6.23 percent on Nov. 27. That compares with a 70 basis-point rise to 2.68 percent for similar-rated notes globally.
People’s Bank of China Governor Zhou Xiaochuan’s signal the central bank will act to prevent excessive leverage has contributed to the surge in borrowing costs and forced many firms to delay financing plans. Rising interest rates may cause a “partial debt crisis to explode,” the official China Securities Journal said in a Nov. 26 editorial.
“The probability of default will get much higher in 2014 as maturing debt reaches a record,” said Shi Lei, the Beijing-based head of fixed-income research at Ping An Securities Co., a unit of the nation’s second-biggest insurance company. “The central bank’s policy of controlling leverage, which may last a long time, will crowd out companies with bad credit profiles and, ultimately, help restructure the economy.”
Bond sales by Chinese companies are down 23 percent to 1.57 trillion yuan this half-to-date compared with the first six months of the year, according to data compiled by Bloomberg. Companies postponed or scrapped 96.1 billion yuan of bonds in November compared with 29.8 billion yuan the month prior, according to filings on the websites of Chinamoney, Chinabond and Shanghai Clearing House.
The 2.6 trillion yuan of debt due next year consists of a record 2.13 trillion yuan of notes which must be redeemed, and a record 470 billion yuan in interest, the CICC data show. Investors also have options to sell some 200 billion yuan of bonds back to issuers, according to CICC.
There have been no defaults in China’s publicly traded domestic debt market since the central bank started regulating it in 1997, according to Moody’s Investors Service. Guosen Securities Co. estimates Chinese non-financial companies’ debt ratios reached 93 percent last year, while the average in Asia hasn’t surpassed 70 percent in the last 10 years, according to a report released on Dec. 2.
The central bank warned on Nov. 5 the economy may see a decline in leverage over a long period, and said there are “prominent” problems in local government and property industry borrowings. China’s broad debt ratio has also been rising sharply, PBOC Deputy Governor Hu Xiaolian said on Nov. 20.
Following the Communist Party’s Nov. 9-12 plenum, China’s leaders pledged to allow market forces a “decisive” role in the allocation of resources. Societe Generale SA China economist Yao Wei said the announcement signals the government may stop saving troubled companies which can’t meet debt obligations and allow the first bond default in the coming 12 months.
“If the government is going to let market forces play an important role, it should let those doomed companies fail,” said Yao in Hong Kong. “In industries with overcapacity, such as steel and shipbuilding, there’s a higher likelihood of bond defaults.”
Credit risks are most concentrated in highly leveraged sectors, including heavy industries, according to Ping An’s Shi, who said rising borrowing costs will begin to have a “real effect” on the world’s second-largest economy next year. Corporate bond yields may rise to even higher levels in the first half of 2014, he said.
Xinyu Iron & Steel Co. (600782), a Jiangxi-based steelmaker which reported a loss of 175 million yuan for the January to September period, has 3.25 billion yuan of borrowings due in 2014, compared with 0.31 billion yuan in 2013, according to data compiled by Bloomberg. The yield on the company’s AA+ locally rated 2016 debt has almost doubled this year to 10.5 percent as of Dec. 6, according to exchange data.
The yield on five-year AA rated corporate bonds has risen 125 basis points this year to 7.26 percent, according to Chinabond. The rate on similar-maturity government debt climbed 116 basis points to 4.39 percent. The gap widened 8 basis points to 287.
“Companies are facing heavy debt burdens and cash supply is tight. All these factors will make bond defaults very likely,” said Dong Hui, a bond analyst at China Securities Co. in Beijing. “But it’s hard to judge whether the first will happen next year. After all, no local governments want companies in their localities to be the first to default.”
Electricity companies have to repay 520 billion yuan in bond principal and interest next year, the most among all industries, according to CICC, which took out third place for fixed-income research in New Fortune magazine this year. That’s followed by local government financing vehicles, which must repay 239 billion yuan.
As default concerns escalate, the cost of insuring the nation’s debt against non-payment is edging higher. China’s credit-default swaps increased 2.1 basis points last week to 67.5 as of Dec. 6, according to data provider CMA. The swaps rose 1.4 basis points the week prior, advancing for the first time since the five days ended Oct. 25, the data show.
The yuan advanced to the strongest level in 20 years today after the central bank raised the currency’s daily fixing to a record and the nation’s trade surplus widened to the biggest in more than four years. It rose 0.15 percent to 6.0726 per dollar as of 10:04 a.m. in Shanghai, China Foreign Exchange Trade System prices show.
Guotai Junan Securities Co. Shanghai-based bond analyst Li Qing said China’s slowing economy will also increase default probabilities next year. Guotai Junan, the nation’s third-biggest brokerage, forecast economic growth will slow to 7.3 percent next year, from 7.6 percent in 2013.
“Cash supply will probably remain tight and the economy may decelerate from the second quarter of next year,” said Li. The premium on bonds rated AA or lower may widen further, she said.
SocGen’s Yao said some companies averted defaults in 2012 because local governments stepped in to help. CHTC Helon Co., the fiber maker which used to be called Shandong Helon Co. (000677) and became the first company to lose its investment-grade rating in December 2011, repaid 400 million yuan of bonds in April 2012 even as it failed to make loan repayments.
“Whether there’ll be a bond default or not is mostly a political decision,” said Yao. “Huge maturing debt and cash shortages provide conditions for the first default to happen. But whether it will depends on the leadership’s willingness to make the right choices.”
To contact Bloomberg News staff for this story: Judy Chen in Shanghai at email@example.com