Watching the ratings

Trouble at mill? Anshan says default was just a misunderstanding

The Chinese bond market started the year with a false alarm. On the first trading day of 2012, the official clearing house posted on its website that it “had not received sufficient funds from the issuer”. This related to a coupon repayment for a Rmb5 billion ($791 million) bond issued by Anshan Iron and Steel, reports the Financial Times.

It looked as though China was about to experience its first default on a AAA-rated bond.

“I was shocked to hear the news,” a fund manager told 21CN Business Herald. “After all, Anshan is a central enterprise [i.e. controlled by the state], and if it has a cash crisis, other corporate bonds may have greater problems.”

In fact, Anshan was good for the coupon payment, with the scare said to result from a misunderstanding between it and the clearing house. By the end of the day, there was a new announcement saying that the debt had been settled.

But investors did not have to wait long to see another company in real trouble. The next day, Beijing DG Telecommunications Equipment announced that it was unable to repay principal and interest on a Rmb40 million bond, reports Shanghai Securities News. The bond’s guarantor was then forced to meet the issuer’s obligations.

Although the size of the default was small, the news was significant as the payment was a component of a bigger bond made up of the debt of 13 small and medium-sized companies. This financing option had been designed as a new route for smaller corporates to access credit. Large institutions usually buy debt that is rated AA or higher, and face restrictions on the amount of lower-rated bonds they can purchase. “SMEs generally do not meet the standards for issuing bonds independently,” Gu Jihua, a bond investment manager, told Shanghai Securities News. “If they are not repackaged, their individual rating is generally below BBB+.”

But the DG default will probably make these consolidated bonds a harder sell to investors. DG was also downgraded this week to CC by Dagong Global Credit Ratings, along with two other issuers in the bond which (went down to BBB-).

China’s bond market is growing rapidly – up 52% to Rmb2.58 trillion ($408 billion) in 2011, according to Thomson Reuters – but it is still hard for SMEs to get access to credit. Premier Wen Jiabao this week called for the financial sector to do more to support entrepreneurs and small businesses, pledging to “allow market forces a greater say in deciding fund allocation,” reports the China Daily.

A good sound bite: although companies might not always like what the market has to say. Take GHATIC, for example, a firm building highways, airports and tourism facilities in the western province of Gansu. It is rated AA+ by Dagong, yet its debt is pricing closer to AA.

“The pricing of these bonds one level lower than their rating to some extent reflects the effectiveness of the market,” a fixed income research director at a brokerage told CBN. “Gansu is a relatively backward economy with large amounts of debt. The information is not transparent. It seems that everyone is quite sensitive to the risks.”

This looks like becoming a bigger theme as investors become more sceptical about credit outlooks. Indeed, while Anshan didn’t default, 21CN reports the ‘shocked’ fund manager it quoted is still bearish: “Ratings downgrades and a higher proportion of bonds with a lower rating will be a long-term trend.”

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