Date
22 May 2017
Coal companies are some of the most vulnerable borrowers in the mainland corporate bond market. Photo: AFP
Coal companies are some of the most vulnerable borrowers in the mainland corporate bond market. Photo: AFP

China’s corporate bond market: bracing for the storm

For investors in bonds issued by Sichuan Coal Industry Group Ltd., it was a gut-wrenching experience.

They had thought their money was safe following the coal company’s notice on June 7 about its plan to repay the principal and interest of its CP001 bond issue maturing in a week.

But on June 14 Sichuan Coal suddenly alerted the investors about the uncertainties of meeting its obligations, the China Securities Journal reports.

The next day, the nightmare came true: the company could not come up with the funds to pay back the bond holders.

The state-owned firm has been losing money for four consecutive years and it is, like many companies in sector suffering from excess capacity, heavily in debt.

For every 100 yuan (US$15.19) worth of assets, almost 90 yuan is funded by borrowings, the Journal notes.

Bond investors may have to brace for more bad news.

It is estimated that by the end of this year, companies struggling to deal with excess capacity have to collectively repay 233 billion yuan of bonds coming due.

July and August will be a peak repayment period. Earnings results to be announced during those two months aren’t likely to help, analysts say, as poor profitability could prompt rating agencies to cut bond ratings and unnerve investors further.

As always, coal, nonferrous metals and cement are some of the most risky sectors when it comes to borrowings.

Apart from suffering bad operating results, failure to sell assets to raise funds or fruitless attempts to invest in new projects to turn around their businesses are also potential triggers for downgrades.

Investor appetite for these risky bonds is waning fast.

Even shaky companies that are able to hang on to dear life are likely to pay more for future borrowings.

– Contact us at [email protected]

CG

EJ Insight writer

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