China Top Underwriter Sees More Defaults as Bond Sales Jump 66%

  • China Securities expects "many credit events" as funds tighten
  • Offerings of notes reached 2.48 trillion yuan in first quarter

China’s top corporate bond underwriter said defaults will increase this year, casting a cloud over the market after record offerings in the first quarter helped refinance debt.

Six firms reneged on obligations in the first three months, up from zero in the year-earlier period, as Premier Li Keqiang sought to cut the number of “zombie companies” in an economy transitioning to slower growth. While note sales surged 66 percent to 2.48 trillion yuan ($383.6 billion) this year, China Securities Co. said non-payments will escalate further, causing disruptions in the months ahead.

"There will probably be many credit events caused by liquidity problems,” said Huang Ling at the Beijing-based firm, which Bloomberg-compiled data show underwrote the most corporate bonds excluding notes regulated by the central bank in the first three months. “Some external events may trigger withdrawal of lending by financial institutions.”

Defaults Spread

Huang, head of the firm’s bond underwriting department, said note arrangers should be more careful in selecting clients and analyzing the outlook for different industries as delinquencies rise. There were three defaults last month alone as a sausage maker, an iron ore miner and a steelmaker missed payments. Dongbei Special Steel Group Co. said Monday it may not make a 1 billion yuan payment due April 3 and reneged on a smaller security due March 28.

“The economy still has big downward pressure and Chinese companies’ credit environments are worsening,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. “At the same time, the government’s stimulus measures have led to some positive results, which may prevent widespread defaults.”

Concerns about creditworthiness have only just started to show up in borrowing costs. Yield premiums on seven-year AAA rated bonds over similar-maturity government notes have increased four basis points this year to 84 basis points, the highest since December.

Foreign companies, including Chinese firms’ offshore entities, sold about 5 billion yuan of panda bonds in the first quarter, compared with 3 billion yuan in the first three months of 2015, according to data compiled by Bloomberg.

Huang said there will be a “blowout” in sales of the notes issued by foreign firms in the onshore market this year, as the lower onshore borrowing costs attract international issuers.

“Regulators may announce clearer policies on panda bonds,” said Huang. “The panda bond market will have a bright future.”

— With assistance by Xize Kang, Judy Chen, and Aipeng Soo

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