In 2010, Dagong Global Credit Rating caused a stir when it lowered its rating for US debt from AA to A+. The downgrade occurred at a time when the international ratings agencies were awarding US government debt top marks. Standard & Poor’s considered the US to be a triple A country.
Some saw the move as a political one, with Bloomberg pointing out that the Chinese rating agency was giving its home country’s debt a higher rating than both the US and Japan.
But less than a year later, the big international agencies were following Dagong in its view of US sovereign borrowing. In August 2011, S&P downgraded its US rating, the first time the agency had ever made such a move.
Now another recent ratings decision by Dagong has created headlines, but this time closer to home. Late last month, the agency revoked its credit rating on a corporate bond issued by Inner Mongolia Chifeng Urban Infrastructure Investment and Development, reports 21CN Business Herald. This is the first time that a Chinese ratings agency has withdrawn a rating and it comes at a sensitive time, after China’s capital markets were rocked by a rapid rise in interbank lending rates last month (see WiC199).
The bond in question was issued in 2010, raising Rmb1.2 billion ($195.5 million). The seven year paper carried a 6.18% coupon and was issued by a local government financing vehicle in Chifeng, a city in Inner Mongolia. This kind of debt, sometimes described as “quasi-municipal”, has the high-yield associated with a corporate bond, but at the same time is supposed to be lower risk because it is backed by a local government. (Most local governments are barred from issuing debt directly.)
Dagong said that the withdrawal came after multiple requests to get the information that it needed from the issuer to update its rating. Without Chifeng Urban’s cooperation, the agency felt unable to make a proper judgement and revoked its rating, reports 21CN.
The decision didn’t result in wider panic, although some fear it could be a sign of a more common event in the months ahead.
“Although this crisis has passed, the next crisis will inevitably come,” the manager of a bond fund told 21CN.
A run on quasi-municipal debt could be ugly, because it is already a large debt market that has grown rapidly in scale. China’s cities and provinces issued 434 of these bonds in the first half of the year, raising a total of Rmb521.7 billion.
Furthermore, there are 2,206 quasi-municipal bonds outstanding, involving Rmb2.2 trillion worth of capital, according to iFinD data.
Hongyuan Securities predicts that just one default in the quasi- municipal market could cause a chain reaction as yields spike higher.
But at the same time, the rate at which these new bonds are being issued has also been slowing.
“Over the last week, quasi-municipal bond issuance completely stalled,” a Citic Securities analyst told Oriental Morning Post. This could be due to a move in April in which the market authorities tried to tighten procedures for issuing corporate bonds. Urban investment companies with an asset to liability ratio above 65%, as well as those who have already completed two consecutive issues, are now subject to stricter auditing.
Slowing down the flood of credit to local governments seems like a wise move. But the next step is to ensure that much of the debt already outstanding doesn’t go sour.
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