China re-fi could hit a great wall

The bulk of Asian corporate debt slated to mature in 2017 is from Chinese issuers, which are now perceived as facing the greatest challenge to obtain refinancing.

Increasing funding needs and market volatility as the US begins to raise interest rates will not present a problem for most Asian borrowers as they look to refinance their debt — except for some issuers from China. But Chinese borrowers represent the greatest part of a wall of debt that must come due over the next five years.

A total of $1.68 trillion in Asia ex-Japan corporate bonds are due to mature through to 2020. The year to watch is 2017, which poses the highest single amount of debt coming due over the next five years. It accounts for $398.2 billion, or nearly 24% of the total, across 2,595 deals, according to Dealogic data.

That’s a lot of debt that may require refinancing, but for many issuers, the situation looks benign. Demand looks to continue to outweigh supply. Asian borrowers have plenty of funding sources, ranging from local bond and loan markets to international markets, including the 144A market for larger deals, said Jon Pratt, head of Asia debt capital markets at Barclays in Hong Kong.

For example, Asian issuers have been keenly considering euro-denominated debt over the last few months versus US dollar-denominated issuance, buoyed by Europe’s low interest rate environment and weaker currency.

“They have a lot of weapons in their toolkit. I’m not overly worried at all about the refinancing risk,” Pratt said. “Also, there’s been so much FX volatility in the US dollar space, spurring Asian issuers to consider alternatives like euro-denominated bonds.”

Global euro-denominated debut currency issuance jumped 31% in 2014 from 23% the year before, while US dollar-denominated maiden bond volumes fell to 36% during the same time period from 61% in 2013, according to Dealogic.

Additionally, the interest rate environment in Asia still remains relatively benign and is likely to stay that way for a while, regardless of whether the US Federal Reserve increases its federal funds rate this year. This means that local companies should still be able to benefit from the region’s lower cost of funding.

The Bank of Korea, for example, was the latest to join a growing list of central banks in Asia to cut rates, opting to support economic growth rather than be too disciplined about rebalancing high levels of sovereign debt.

On March 12, the BoK surprised by cutting its base rate a quarter of a percentage point to a record low of 1.75%, following a rate cut by Thailand’s central bank on March 11 when it lowered its main policy rate — the one-day repurchase rate — by a quarter-percentage-point to 1.75%.

Central banks from China to India have cut rates since the beginning of this year as falling oil prices have caused deflation and slowed growth in many countries.

“Essentially we are seeing rate cuts across the region, meaning there’s a lot of liquidity coming in from Asia,” said Charles Chang, head of Asia fixed income strategy, credit trading and structuring at Credit Suisse, speaking at a Fitch sovereign credit conference on March 17.

“Also, as Europe goes through its own quantitative easing programme, we will see liquidity coming in from there,” he said, adding that there will be continued support and appetite for Asian credit over the next few years.

Mainland complex

The exception to this favourable outlook concerns Chinese borrowers, many of which are likely to face refinancing headwinds in the coming years, fixed income bankers said. The slowing economy and concerns about the stability of pricing in real estate, for example, have led to mounting scrutiny of some Chinese issuers by investors and bankers alike.

China accounts for 71% of Asia ex-Japan corporate debt due to mature through to 2020, with $1.2 trillion or 5,355 deals. As with the region in general, China issuer maturities peak in 2017, when $284.3 billion, or 1,401 transactions are expected to expire, added the data provider.

In other words, Chinese issuers comprise over 70% of the total amount due in 2017, making them more like the standard rather than the exception for Asian refinancing needs.

Source: Dealogic

Investor appetite for Chinese companies has been partially affected by the Kaisa near-default saga, sending jitters across the credit space particularly to the property sector. This has also prompted concerns that there may be other issuers on the same boat.

In a January 29 Standard & Poor’s report, the rating agency said that a default from Kaisa is likely to make financing conditions difficult for Chinese high-yield property developers.

“We believe the offshore market will take time to recover,” said Standard & Poor's credit analyst Christopher Yip in the report. “Developers with already-weak liquidity and high refinancing needs in the next 12 months may face a funding crisis as financing sources could be steered toward more stable players.”

Credit analysts have changed the outlook for Asian credit, favouring investment grade over high-yield and banks over corporate debt.

Morgan Stanley’s credit analyst Viktor Hjort said the old-economy sectors — steel, cement and mining — are challenged by overcapacity, sluggish earnings and highly leveraged balance sheets, and they dominate the high-yield universe in China.

“Capacity shutdowns would help companies in these sectors — the winners who survived — stabilise earnings, disinvest and improve free cash flow,” said Hjort. “However, we have yet to see strong evidence of stabilisation so far from a bottom-up perspective and thus remain cautious on turning optimistic too early.”

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