COVID-19 Refinancing Risk Elevated for 6% of Rated China Corps

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Wednesday, February 26,  2020 /1:30 PM / By Fitch Ratings / Header Image Credit: The Motley Fool

 

This is a correction of a Fitch Wire published on 17 February 2020, to reflect an early bond redemption by Xinyuan Real Estate Co., Limited and recent capital-raising by Landsea Green Properties Co., Ltd, which have reduced refinancing risks associated with maturities, resulting in an adjustment of our risk assessment for these two companies to 'Low' from 'High', as per the framework applied in this research.

 

The COVID-19 outbreak has affected operations of most of the 166 Chinese corporates which are publicly rated by Fitch to varying degrees. These issuers face a combined CNY583 billion-equivalent of domestic and cross-border debt maturities from February through June 2020. According to our latest assessment, we have identified 6%, or 10 issuers, that face moderate to high risks in relation to their capital market debt maturities over this period.

 

This assessment took into consideration a number of factors in addition to the quantum of capital market debt maturities. These included the potential impact on business operations from the virus outbreak; capital market refinancing burdens; ownership structures (whether the entity was state-linked); and pre-outbreak credit quality.

 

Overall, we assess the refinancing risk as low for 156 corporates, the vast majority; moderate for five; and high for only five. The five issuers assessed at 'high', detailed in the table below, are currently rated in the 'B' category or below, and are mostly homebuilders.

 

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Most businesses in China will be affected by the epidemic to varying degrees, but issuers in some sectors have more operational and financial flexibility than others, for example the larger homebuilders. The Chinese authorities have taken many measures to ease access to finance. Notwithstanding this, refinancing risks associated with maturing capital-market debt obligations - both domestic and cross-border - will persist over the next few months. The risks are especially high for those issuers that were already struggling prior to the outbreak of the virus.

 

Our assessment focuses on the capital market-related refinancing needs of publicly rated Chinese corporates over February to June 2020, and identifies those that face an elevated level of risk in relation to these debt maturities. Little over half (87) of these firms face local or cross-border bond maturities during this five-month period. The pool of companies whose low capital refinancing needs will mitigate the high impact of the health crisis on their operations includes companies such as Dongfeng Motor Group.

 

Capital market debt maturities over the five months to June represent 10% or more of 2019F total debt for 14 issuers, and some have less cash resources than their respective amount of capital market debt maturities. However, many are state-linked entities that should have reasonable capital market access.

 

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State-owned enterprises account for the vast majority of local bonds maturing over February-June 2020, with issuers in the energy and utility sectors accounting for around two-thirds of domestic debt maturities. Among cross-border bond maturities, private-sector issuers dominate, and property sector issuers account for around half. The proportion of sub-investment-grade issuers is also significantly higher for cross-border bonds than for domestic bonds, with 'B+' and lower-rated issuers accounting for nearly 30%. Most of these are homebuilders.

 

Our report, "Chinese Corporates: Coronavirus Refinance Risk Screener", details our framework of assessment; identifies issuers that face elevated risk in relation to their capital market debt maturities; and provides issuer-level assessments and details of refinancing requirements and associated risks.


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