Commentary on Political Economy

Wednesday, 10 June 2020


China’s Companies Find Ways to Avoid Bond Blowups

Some methods include asking creditors to wait longer for repayment or forgo the right to redeem bonds early

HNA Group is one Chinese company that has maneuvered to avoid a straightforward debt default.

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Chinese companies are avoiding or minimizing bond defaults, even as the economy shrinks for the first time in decades.
China’s domestic corporate-bond market is one of the world’s largest, with a total face value of about $5.1 trillion, according to Wind. Yet while there have been defaults recently, the shock of the coronavirus pandemic hasn’t produced anything to rival high-profile U.S. collapses such as Hertz Global Holdings Inc. HTZ -24.41%
Some Chinese companies are asking bondholders to wait longer for repayment, to forgo the right to redeem bonds early, or to switch into new longer-dated securities.
Shandong Ruyi Technology Group, a fashion and textile group that has bought into The Lycra Co. and Britain’s Aquascutum, is among these debtors.
In March, it said holders of a maturing bond in yuan had agreed to receive interest privately, not through the Shanghai clearinghouse as previously planned, and to wait until June for repayment. On June 1, a state-backed firm said it wouldn’t make an investment in Ruyi as planned. That could complicate the textile group’s efforts to repay bondholders, and shows that just buying extra time won’t necessarily fix companies’ financial difficulties.
Qi Junwen, a fund manager at Hangzhou-based Yongan Guofu Asset Management Co., said some borrowers were swapping debt for new bonds. He said others were persuading investors not to exercise put options. These are a common feature of Chinese bonds and allow investors to demand early repayment.
These workarounds could make sense, Mr. Qi said, by keeping firms afloat, making investors’ track records look better and saving jobs and tax revenues for local governments. “When you look around, you see incentives for almost every party involved in a stressed investment to roll over the debts, rather than calling it default,” he said.

Credit Risk

Corporate bond defaults in China have risen in recent years.

Annual total of new defaulted debt

 billion yuan
New defaults
*Year to date
Notes: Excludes privately placed corporate bonds issued before 2015. Amounts reflect issuers’ total onshore debt outstanding by face value at default.
1 billion yuan=$141 million
Sources: Goldman Sachs calculations based on Wind, Bloomberg and company announcements
So far this quarter, defaults on nonfinancial corporate bonds in yuan have totaled about $626 million. That compares with defaults affecting about $65.3 billion of dollar-denominated nonfinancial corporate bonds, according to the Institute of International Finance.
There are parallels with China’s banking industry, where defaults have been muted by a coordinated effort to let companies and individuals defer loan payments.
“Defaults are being delayed,” said Ron Thompson, managing director and head of restructuring in Asia for Alvarez & Marsal.
Mr. Thompson said banks in China have been guided by regulators not to force companies to repay their loans for now, while in the bond market some companies have been able to reissue bonds that investors put back to them. He added that there could be an uptick in defaults next year when much of the bank forbearance ends.
Whether adjustments to bonds amount to a default isn’t always clear-cut, and can depend on whether investors get inducements such as higher interest rates.
HNA Group, another formerly acquisitive conglomerate, angered small investors in April after it called a creditor meeting with 90 minutes’ notice to extend the maturity of yuan notes due the next day, without offering compensation. Big creditors agreed to the proposal.
S&P Global Ratings views HNA’s move as a technical default. Still, such a maneuver is typically less damaging for a company than a straightforward failure to repay interest or principal on time, since it doesn’t usually prompt bank lenders and others to demand their money back too.
S&P analyst Li Chang said compared with last year, more companies were making bond payments privately, rather than through official channels such as a clearinghouse or stock exchange.
Mr. Li said in almost half of such cases, borrowers extended debt maturities, but since these deals were reached privately, the results weren’t clear to outside investors.
There are still straightforward defaults. Looking back further than the Institute of International Finance data, S&P says onshore bonds with a face value of 62.8 billion yuan (US$8.87 billion) defaulted in the year to Tuesday, up 20% year over year. Peking University Founder Group, which was struggling before the pandemic, accounts for about half of that total.
Judged by another measure—distinct entities defaulting for the first time this year—distress is actually ebbing. Including maturity extensions, S&P has only recorded 14 such cases in China in 2020, down from 19 last year. It considers this metric a good indicator of emerging credit risks.
Some say China is backsliding on moves toward a more efficient, Western-style market. Onshore bond defaults were unheard of until 2014, but have risen steadily in recent years.
“Acknowledging that there has been too much bad debt built in the economy, Beijing was inching towards slow restructuring of the system,” where the government had previously backed everything, said Leland Miller, chief executive of research firm China Beige Book. “But Covid has destroyed this movement.”
Others say easier financial conditions have helped avert bond defaults, just as forceful Federal Reserve action has supported U.S. credit markets.
Hayden Briscoe, head of fixed income for Asia Pacific at UBS Asset Management, said easier monetary policy and a more relaxed attitude to the shadow-banking system had played a big role in keeping down Chinese defaults recently.

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