Strapped-for-Cash Chinese Companies Find New Ways to Borrow

  • ABS sales by Chinese companies more than doubled last year
  • Doubts about ring-fencing of collateral for ABS: Genial Flow

Cash-strapped Chinese companies are ramping up sales of asset-backed securities to raise funds as they face record delays in collecting payments from customers.

Structured note sales backed by assets such as receivables jumped 130 percent to 455.2 billion yuan ($65.7 billion) last year, based on official data released Monday. They accounted for 54 percent of all asset-backed securities issued in China, up from 33 percent in 2015. By comparison, notes backed mainly by bank loans, which used to constitute the bulk of ABS issuance, fell 4.6 percent in 2016, the data show.

Chinese firms have been trying to find new ways to borrow as they weather the worst economic slowdown in a quarter of a century, with government measures to rein in risks in financial markets tightening their access to credit. Corporate bankruptcies in China jumped an estimated 20 percent in 2016 and will likely rise 10 percent in 2017, according to estimates from Euler Hermes Group. Sales have also been fueled by government support for firms to monetize assets and increase cash flow.

“Companies in China, especially the private sector, are having a hard time getting financing,” said Wang Xuebin, executive director at the investment banking arm of JPMorgan First Capital Securities Co. “The jump in ABS issuance was also driven by the fact that corporate bond sales became harder in the second half 2016.”

It now takes a record 94 days for companies to collect cash on completed sales, up from about 76 two years ago. In addition to issuing ABS, companies are selling unpaid customer bills to financial firms in order to fill the funding gap.

Investors are demanding higher yield premiums to hold bonds since the beginning of October as tighter monetary conditions triggered an unwinding of leverage by banks and brokerages. Average yield premium of top rated five-year local corporate over government bonds rose 50 basis points in 2016, the most since 2011.

By comparison, the spread on AAA rated five-year ABS widened 40 basis points over sovereign notes, according to ChinaBond data. For investors, there should be lower risk investing in ABS than bonds issued by the same firm because ABS are secured by income generating assets and are isolated from other operations of the company, according to Wang.

Yitong Road and Bridge Co., a toll road operator in Ordos City in northern China, failed to make payment on 70 million yuan of ABS due on May 29, becoming the first company to default on the product in the nation, according to ChinaBond. In October, United Credit Ratings downgraded two ABS products issued by Bohai Steel Leasing to A from AAA, citing the issuer’s deteriorating asset quality and external guarantor Bohai Steel Group Co.’s lack of ability to repay the ABS in case of failure.

“As the economy slows, ABS investors could face higher risks if the underlying assets are heavily related to the real economy such as account receivables and beneficiary rights,” said Li Yan, general manager of the structured finance department of China Chengxin International Credit Rating Co.

For some investors the credit quality of the company ultimately sponsoring the ABS deal is what matters because of risks around the collateral.

“There is uncertainty whether the underlying assets for ABS will be truly isolated,” said Cheng Peng, Beijing-based head of investments at Genial Flow Asset Management Co. “We consider more the creditworthiness of the issuer, the same as we look at bonds.”

— With assistance by Yuling Yang, Lianting Tu, and Jing Zhao

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