Aviva Sees Dollar Bond Costs Rising as Chaori Flags China Risks

Chinese companies will have to pay higher yields to borrow in dollars as the first default on an onshore bond looms, Aviva Investors Asia Pte said.

The interest rate borrowers will have to pay will probably widen after falling to 294.8 basis points yesterday, the least in six weeks, according to Tim Jagger, a money manager at U.K. insurer Aviva Plc’s Asian asset management unit. Costs for Asian companies slid to the lowest in nine months, HSBC Holdings Plc indexes show.

Shanghai Chaori Solar Energy Science & Technology Co., a Chinese maker of energy cells to convert sunlight into power, said March 4 it may not be able to make an 89.8 million yuan ($14.7 million) interest payment in full by tomorrow’s deadline. Companies in China are already delaying note sales and a default may be the nation’s “Bear Stearns moment,” prompting investors to reassess credit risks as they did after the U.S. lender was bailed out in 2008, Bank of America Corp. strategists said yesterday.

“There’s going to be a trickle-down effect,” Singapore-based Jagger said. “Given the increase in risk aversion toward China, issuers irrespective of their credit quality are going to have to offer some concession to get the size of bond they want.” Aviva Investors managed 246 billion pounds ($411 billion) in assets as of Sept. 30.

Sales Scrapped

Suining Chuanzhong Economic Technology Development Co. will delay a planned 1 billion yuan offering due to “serious fluctuations in the bond market following Chaori Solar’s statement,” it said in a statement on ChinaBond’s website yesterday. Taizhou Kouan Shipbuilding Co. said it will postpone a 300 million yuan sale because of “big fluctuations in the market.”

Xining Special Steel Group also canceled a planned 470 million yuan-bond sale citing “recent market changes,” while Qunsheng Group Co. scrapped a 500 million yuan bond offering because of a lack of demand.

Chaori Solar’s 1 billion yuan of March 2017 notes were quoted at 56.55 percent of face value yesterday, down from 76.22 percent the day before according to ChinaBond valuations.

Former People’s Bank of China adviser Li Daokui was cited as saying in a China Securities Journal report today that there isn’t any need to panic about a bond default because it only reflects normal volatility in the bond market.

Greater Discipline

Any non-payment may ultimately help the market, instilling greater discipline in pricing credit risk and resulting in a possible widening of premiums on offshore debt in the short term, Fitch Ratings Ltd. said yesterday.

Credit-default swaps insuring Chinese government debt against non-payment fell three basis points to 87.3 basis points yesterday, the lowest level since Feb. 18. The cost of insuring corporate and sovereign bonds in Asia was little changed today.

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan was steady at 130 basis points as of 8:14 a.m. in Singapore, Australia & New Zealand Banking Group Ltd. prices show. The gauge touched a more than two-month low of 129.4 basis points yesterday, according to data provider CMA.

The Markit iTraxx Japan index was also little changed at 76.8 as of 9:13 a.m. in Tokyo, Citigroup prices show. The gauge has ranged from 67.2 basis points and 88.5 basis points this year, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The Markit iTraxx Australia index slipped 0.5 of a basis point to 100.8 as of 11:11 a.m. in Sydney, according to Citigroup Inc. The benchmark is poised for its lowest close since Feb. 18, CMA data show.

Credit-default swap indexes are benchmarks for insuring bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.