China’s Riskier Companies Pay Up to Raise Bond Financing

Investors are cooling on debt from riskier Chinese companies after missed payments by state-backed firms have cast doubt on the reliability of government support.

The wariness has helped push new borrowing costs for these businesses to their highest levels in nearly two years, marring what has been a banner year for debt issuance.

In November, corporations with below triple-A credit ratings paid an average 5.89% coupon for stock-exchange listed debt, according to Wind, the highest since January 2019. In contrast, triple-A coupon rates fell to 4.09%. Some Chinese bonds trade on exchanges while others trade in the interbank market.

In another sign of rising risk aversion, companies had to scrap or postpone plans to sell bonds worth the equivalent of $14.6 billion last month, Wind data shows, the highest monthly total since early 2017.

Chang Li,

a Beijing-based director at S&P Global Ratings, said borrowing costs have risen in particular for companies in northeastern and western provinces where local governments have limited financial resources.

Costs have also risen in industries burdened by overcapacity, he said. That would likely include companies specializing in areas such as mining, chemical production and heavy industry.

Most corporate debt in China is issued by state-owned enterprises, which made up about nine-tenths of issuance both this and last year, according to Rhodium Group.

After the recent upsets, investors are trying to work out which of these firms are truly creditworthy or strategically important enough to count on continued state support.

Credit grades in China are an imperfect gauge of risk. The three state-backed companies—a coal-mining company, chip maker and automotive firm—that recently ran into trouble all boasted triple-A ratings. But in the absence of better tools, investors are using ratings as one way to pick winners.

They are also concerned that China could resume its deleveraging campaign, a yearslong project to rein in debt and financial risk that was put on hold by the trade war and the coronavirus.

If it returns, ailing companies will be a prime target, potentially saddling bondholders with losses in the process. In 2018, a group of top Chinese authorities, including the central bank, told local governments to identify zombie companies—unprofitable businesses propped up by state support and bank loans—and restructure or shut them quickly. But no such companies were ever named. Nor did the central government ever provide an update on the project’s progress.

“The campaign of resolving those highly indebted companies…stalled in 2019, with the economic slowdown and heightened U.S.-China trade tensions and has been delayed further due to the pandemic,” said Mr. Li at S&P.

He expects authorities to resume their campaign now that the economy is back on a firmer footing.

However, determining what companies will endure could be challenging. There is no clear definition of zombie companies, giving extra leeway to local governments, which are eager to preserve jobs and social stability.

“It’s a guessing game or more of a political game, said

Leland Miller,

chief executive of research firm China Beige Book. “It would be very tough for investors in general to peer through the haze and pick the corporates that might survive.”

Logan Wright,

director of China market research at Rhodium, said localities kept some struggling firms in business after commodity prices rose in 2017-2018, effectively arguing that they had suffered problems during an economic downcycle but weren’t “structural zombies.”

Yongcheng Coal & Electricity Holding Group Co., one recent defaulter, has been profitable since 2017.

Hayden Briscoe, head of Asia-Pacific fixed income at UBS Asset Management, said he expects defaults among SOEs to rise, as authorities push for consolidation within industries.

Weak players will be forced to enter restructuring or bankruptcy proceedings, but some struggling firms may end up surviving, Mr. Briscoe said, if they are strategically important to the economy and the government’s development goals. That means evaluating debt from state-owned firms requires analyzing not just financial performance, but industry dynamics and the likelihood of government backing, he said.

Overall, Chinese companies issued the equivalent of $2.3 trillion in yuan-denominated bonds this year through Dec. 2, already 23% more than 2019’s total, according to Wind.

Before the recent spate of high-profile defaults, many Chinese borrowers had avoided or minimized defaults by sometimes asking bondholders to wait longer for repayment, to forgo the right to redeem bonds early, or to switch into new longer-dated securities.

China has also asked banks to avoid forcing companies into default, as lockdowns and business closures deprived many firms of revenue. Nonperforming loans made up just 1.96% of commercial banks’ outstanding loan balances at the end of September, just 0.1 percentage point higher than a year earlier, suggesting banks have been slow to recognize bad debts.

Write to Xie Yu at

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