dinsdag 4 april 2017

China Starts 2017 With Highest Number Of Corporate Defaults In History

Back in October 2015, roughly around the bottom of the recent commodity cycle, we reported a stunning statistic: more than half of Chinese companies did not generate enough cash flow to even cover the interest on their cash flow, and as we concluded "it is safe to assume that up to two-third of Chinese commodity companies are now at imminent danger of default, as they can't even generate the cash to pay down the interest on their debt, let alone fund repayments"...


While commodity prices have staged a powerful bounce over the past 18 months, and despite the government's powerful drive to avoid major defaults over concerns about resulting mass unemployment, the inevitable default wave has finally arrived, and as Bloomberg reports overnight, "China’s deleveraging push has racked up the most defaults on corporate bonds ever for a first quarter, and the identity of the debtors is pretty revealing." Seven companies have defaulted on a total of nine bonds onshore so far in 2017, versus 29 for all of last year, according to data compiled by Bloomberg. In a sign of the struggles facing China’s old economic model, most of them depend on heavy industry and construction. While it’s still far from a crisis point, the defaults shows how policy makers’ efforts to reduce the liquidity that had propelled the bond market until late last year is exacting casualties. Cited by Bloomberg, Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen said that “weak companies can’t sell bonds, which adds to the pressure on their cash flow."
As a result, "the pace of defaults will continue. It will be even more difficult for weak companies to sell bonds because corporate bond yields may rise further, the current yield premium doesn’t provide enough protection against credit risks.”  As discussed in recent months, the Chinese central bank has been curbing leverage in money markets leading to a spike in borrowing costs...


Which has also hit issuance: making rolling over of existing debt prohibitive for many. Firms rated AA, generally considered junk in China, sold 33 billion yuan ($4.8 billion) of bonds in the first quarter, the least since 2011, Bloomberg data show. Chinese companies have scrapped 129 billion yuan of bond sales since Dec. 31, a jump of more than 50 percent from the same period a year before. Continuing the deleveraging push, and further tightening financial conditions, over the weekend, the PBOC boosted rates on loans aimed at small- and medium-sized financial institutions while as reported last weekend, smaller and mid-size banks have been caught in the cross hairs of shadow banking deleveraging, with some said to have missed debt payments in March...


Not surprisingly, Bloomberg reports that four of this year’s nine defaulted bonds were issued by companies based in the northeast rust-belt province of Liaoning, which has been among the areas hit hardest by China’s focus on reducing capacity in industries such as steel and coal. Another key Chinese commodity producing province, Hebei, which is the nexus of China's steel-production has so far been spared as a result of lying about its production cuts, however recent revelations have prompted Beijing to crack down on local factories, resulting in the recent decline in iron-ore prices, which will likely have adverse impacts on Chinese upstream steel suppliers, and result in even more defaults in the coming months....