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Rising fundraising costs in dollars are hurting Chinese companies

  • Regular
  • Asian Market
  • 3 months ago
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When it comes to borrowing in dollars, creditors appear to view debt-soaked Chinese enterprises as subprime recipients.

The average interest rate stands at 7.8% for offshore corporate dollar bonds floated over the past three months, up 2.2 percentage points from a year earlier.

The average period to maturity has shrunk as well.

The tougher procurement environment comes on top of the Chinese economic slowdown.

The higher cost of obtaining dollars threatens to squeeze earnings and cash positions at these enterprises, creating deeper economic troubles in the country.

Companies based in China have issued about 400 tranches of dollar-denominated bonds since 2016.

This figure excludes bond floats by banks.

Average interest rates over three-month periods hovered in the 5% and 6% range for two years through 2017, then broke into 7% territory in 2018.

The maturity of bonds issued between December 2018 and this month averaged 2.6 years, down from 3.3 years in the year-ago period.

Chinese enterprises are being hit hard by having to pay higher procurement costs for funds that are available for a shorter time.

The interest rate even tops 10% more frequently, especially in the real estate industry.

Last month, Modern Land floated one-and-a-half-year dollar bonds sporting an exorbitant coupon of 15.5%.

The Beijing-based builder is basically offering a 13-point risk premium over the two-year U.S. Treasury yield.

Big-name Chinese property developers, such as Greenland Holding Group and China Evergrande Group, have accepted offering rates between 8% and 10%. HNA Group, a conglomerate facing a financial crunch, coughed up a 12% interest rate on debt issued in October.

One big reason that investors are demanding pricey coupons is the prevalence of debt defaults in China's business community.

Defaults for corporate bonds denominated in China's currency totaled 120 billion yuan ($17.7 billion) last year. For this year through mid-February, defaults have already surpassed 10 billion yuan.

These defaults seem to have little impact on investors, since the debt often is purchased by Chinese banks.

Defaults on dollar-denominated bonds remain in single-digit numbers.

Concerns about deterioration of corporate earnings amid the Chinese slowdown and U.S. trade frictions have also lifted dollar bond yields.

Among the 3,600 companies listed in Shanghai and Shenzhen, about 1,100 have turned in net earnings declines for 2018.

Among them, 400 enterprises are believed to have fallen into the red.

Net earnings shrank roughly 3% for 2,600 corporations that have released earnings estimates.

 

 

Source: Smart Trend Team