Chinese company bond defaults predicted to surpass 2020 valueBusiness | 12 Jan 2021 10:19 am
Defaults by Chinese companies are likely to top last year’s record as tighter monetary policy squeezes borrowers, according to China Merchants Securities Co.
Some 39 Chinese companies both domestically and offshore defaulted on nearly US$30 billion of bonds in 2020, pushing the total value 14 percent above 2019’s, Bloomberg reports. Locally, delinquencies fell to 137 billion yuan (US$21 billion) from 142 billion yuan the previous year, while offshore they grew to US$8.6 billion from US$3.9 billion.
“The central bank will implement more prudent monetary policies this year,” said Yuze Li, a credit analyst at China Merchants Securities. “More companies may face refinancing pressure. As the maturities jump, the default amounts will climb by an estimated 10 percent to 30 percent from the previous year,” he said, referring to both onshore and offshore defaults.
Average monthly onshore defaults in the second half of 2020 grew by 47 perent to 13.6 billion yuan from 9.2 billion yuan in the first half.
The technology sector accounted for 28 percent of 2020’s total onshore defaults, led by state-linked Peking University Founder Group Corp. The consumer industry was next, due to Brilliance Auto Group Holdings Co.’s default, with 36 billion yuan. The financial sector came third with 26 billion yuan.
In the dollar-bond market, the financial sector accounted for about 43 percent of total defaults, followed by technology and energy. ?Five state-linked companies defaulted for the first time in the onshore bond market, the most since 2016.
Over the past three years, Qinghai province has the worst default ratio of 19.5 percent, followed by Hainan province, Liaoning province and Ningxia region with more than 7 percent each. This measure of borrowers’ missed principal and interest payments as a percentage of outstanding debt highlights areas with weaker economies and poorer financial management.
Offshore, part of the focus by investors this year is on so-called keepwell bonds. Some investors initiated legal action offshore after Peking University Founder Group’s restructuring administrator rejected in August their requests to recognize claims on five keepwell bonds backed by the defaulter. The parent firm of Tsinghua Unigroup Co., a chipmaker backed by another prestigious Chinese university, last month told a bondholder meeting that it doesn’t believe it’s responsible for honoring repayment of Unigroup’s keepwell notes.
The keepwell provision often involves a Chinese company’s pledge to keep an offshore subsidiary that is issuing the bonds solvent – but without any guarantee of payment to the bondholders.