Chinese high-yield borrowers face refinancing crunch

Moody’s released the latest series of its Asian Liquidity Stress indicator earlier this month and found it at the highest level on record, 38.6%.

Evaluating that number in its own right is arcane, but what is significant is that it is at a higher level even than at the height of the global financial crisis.

Another Moody’s report helps us to understand why. The problem is, primarily, about the refinancing ability of Chinese high-yield companies.

RMB4 trillion of onshore bonds issued by Chinese companies will mature in 2019, 62% of which have an AA or lower onshore rating.

In the Chinese offshore system, AA- is the threshold of investment grade, and therefore theoretically equivalent to BBB- in international systems; in practice, many doubt the equivalence and think Chinese ratings far weaker.

Additionally, $56 billion of offshore Chinese corporate bonds are due in 2019, half of which are high-yield or unrated, according to Dealogic.

Trade war

These numbers, in themselves, are not extreme, and in fact less onerous than 2018 – the really heavy redemption hits come in 2021 – but the problem is that refinancing, both onshore and offshore, is difficult in light of the US-China trade war.

“Chinese high-yield issuers that need to refinance in 2019 will encounter challenges as the US-China relationship evolves,” Moody’s says.

While China will try to support refinancing and investment sentiment in the onshore market, “the benefits of these policies are unlikely to cascade down to weak issuers”, Moody’s says, still less to those refinancing in the offshore market.

While China is clearly the heart of the problem … south and southeast Asian indicators are also at record levels of weakness 

Public bond defaults in China hit a record level in 2018, most of them in the second half; China is quite ready to tolerate defaults if it doesn’t think they will lead to systemic risk.

Investors, seeing this, are likely to make a flight to quality, which won’t help weaker issuers refinance. On top of that, interest rates are rising and tenors shortening.

Main driver

And it’s not all about the capital markets.

Moody’s also notes that the main driver for weakening liquidity through 2018 was “the increasing number of companies that rely heavily on uncommitted, short-term facilities from relationship banks”.

There are now 64 companies in Asia with the weakest speculative-grade liquidity score Moody’s can confer; that went up by six in a month in December.

And, while China is clearly the heart of the problem – the China industrials sub-indicator weakened to a record 59.6% in December – south and southeast Asian indicators are also at record levels of weakness, with Indonesian property names particularly problematic.

The problems that beset these companies are global ones, but Asia appears to be in worse shape than others: Moody’s liquidity indicators for the US, or for EMEA, are nothing like as bad.

This is partly a function of the lack of maturity of Asia’s debt capital markets, and partly because of the reliance on local bank markets for uncommitted funding in Asia.

There is a widespread belief that creditors will automatically roll over short-term and uncommitted lines of credit in Asia. If that stops, we’re going to have a difficult year.

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