Private Chinese Companies Get No Relief in Bond Market
Following a series of rate cuts by China’s central bank, the corporate bond market has been cheered by declining yields, but only state-owned enterprises seem to have benefited from lower borrowing costs and private companies are still struggling.
As of Dec. 5, the yield spread between AAA-rated corporate bonds issued by central state-owned enterprises (SOEs) over government bonds of the same quality narrowed by 8 basis points from early November before the rate cuts, and the spread for local SOEs shrank by 7 basis points. Meanwhile, the spread for similar private corporate bonds widened by 2 basis points, data from Everbright Securities showed. A basis point is a hundredth of a percentage point.
The difference is even greater for lower-rated bonds. The yield spread for AA+ private corporate bonds over government bonds expanded by 3 basis points during the same period, data showed.
Private enterprises still face difficulty borrowing via bond sales and have to pay interest rates 100-200 basis points, or 1-2 percentage points, higher than similar bonds issued by state-owned enterprises, said Liu Yang, a general manager at China Chengxin Credit Rating Group.
In terms of net bond financing, state-owned enterprises increased borrowing through bond sales in November, taking advantage of the lower rates, while net bond financing declined among private companies except real estate businesses.
Local SOEs issued 315.3 billion yuan ($44.8 billion) of bonds in November, according to data compiled by Guosen Securities. After paying off debt, their net financing came to 170.5 billion yuan, more than doubling from October. In contrast, private companies issued only 45.5 billion yuan of bonds and had negative net financing of 18.1 billion yuan.
Real estate companies were the only bright spot in the bond market. Private property developers had net financing of 2.9 billion yuan in November, compared with negative net financing the previous month of 17 billion yuan.
Investors’ risk appetite for safer debt and rising default risks among private issuers have increased demand for SOE bonds over private debt, contributing to the widening of the yield spread, said Zhang Xu, fixed-income analyst at Everbright Securities.
The number of bond defaults by Chinese onshore companies just broke another record this year. As of Monday, 164 bonds defaulted in 2019, missing principal payments of 129.4 billion yuan, exceeding totals for all of 2018, according to data from Wind Financial.
As in 2018, private issuers accounted for most of the defaults this year. Weak fundamentals, heavy debt burdens from earlier rapid expansion and tightening credit conditions contributed to private companies’ credit crisis, said Yang Aodi, a vice general manager at China Chengxin Credit Rating Group.
Since the beginning of this year, some private companies have also been exposed with major defects in corporate governance and internal controls, including inflated financial reports, Yang said.
Actually, private companies have shown stronger profitability than state-owned peers so far this year, even though SOEs have received more credit and policy support, Chengxin’s Liu said. During the first 10 months, profits at SOEs declined 12% from the same period last year, while private companies posted a 5% increase.
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