Rise in Bond Defaults Flashes Warning on Debt Risks
China’s bond market is witnessing a growing number of defaults as a crackdown on “shadow banking,” the government’s campaign to control corporate leverage, and slowing profit growth have dented the ability of weaker companies to repay or refinance their debts.
In the first four months of 2018, 15 companies failed to repay their bonds compared with 12 in the same period last year, an increase of 25%, according to a new report from China Central Depository & Clearing Co. Ltd. (CCDC), a state-owned company that provides depository and clearing services for the domestic bond market. The amount of money involved jumped by 33.6% to 12.9 billion yuan ($2.04 billion).
“If you look at the defaults that have already occurred this year, default pressure is relatively high right now,” Huang Zhiyuan, senior deputy manager of the CCDC’s statistics and monitoring department, said at a briefing on Friday. “We can expect the amount of defaults to increase in May on a year-on-year basis.”
Among the companies who failed to repay bonds in the first four months were Shanghai-listed China Security & Fire Co. Ltd., an electronic security products provider, which defaulted on 91 million yuan in debt; and Fugainiao Co. Ltd., a Shanghai-listed shoemaker, which was unable to repay 800 million yuan of bonds that was due on April 23.
China’s nonfinancial companies will see around 5.3 trillion yuan in bonds mature in 2018, the same as 2017, according to an estimation by Jiang Chao, chief macroeconomic analyst at Haitong Securities Co. Ltd. Although defaults account for only a small portion of the total amount of bonds that are due to mature this year, analysts say that investors should brace themselves for more events, especially among companies with a poor credit profile.
The Bond Market Risk Monitoring Report, the first monthly report issued by the CCDC, noted that of the 224 bonds whose market-implied ratings it adjusted in April, almost two-thirds, or 145, were lowered, underscoring the increasing credit risks in the corporate bond market.
Analysts at S&P Global Ratings attributed the rising defaults to tighter liquidity resulting from the government’s deleveraging campaign, which has made it harder for weaker companies to refinance their debt.
“The Chinese government’s financial deleveraging campaign has led banks to unwind the off-balance-sheet funding that some companies have relied on to finance aggressive business expansion in the past several years,” S&P credit analyst Christopher Lee said in a report on Monday.
“Nearly all of the defaulters are privately owned enterprises that rely on local financial institutions for funding,” he said, adding that “default risks for weak borrowers will increase as liquidity tightens, funding costs rise, and maturities swell over the next six to 18 months.”
The CCDC report said that in spite of ample liquidity, credit spreads have risen rather than fallen, indicating that the risk of low-quality issuers failing to refinance their debts is increasing. The gap between the yields on five-year government bonds and AA-rated corporate bonds widened to 214 basis points at the end of April, up 21 basis points from the end of March. Although liquidity in the bond market has been stable, the report noted that the spread between the seven-day deposit repo rate, the interest rate banks charge to each other for short-term borrowing, and the seven-day repo rate, the lending rate all financial institutions charge to each other, widened to 80 basis points in April up from 44 basis points the previous month.
The report also highlighted the growth in the issuance of short-term bonds in the first four months of the year, which could increase debt repayment pressures and trigger further liquidity and credit risks.
Contact reporter Lin Jinbing (firstname.lastname@example.org)
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