These Chinese Junk Bond Issuers Are at Risk if the Yuan Falls 10%


Real-estate developers dominate the vulnerable list: Moody’s

Stress tests have been the rage at central banks for almost a decade. Moody’s Investors Service Inc. has one for China’s junk bonds.

It’s based on how non-financial issuers of high-yield dollar bonds would fare if the yuan slid 10 percent against the greenback. While that isn’t the rating company’s central scenario, the Chinese currency did tumble 6.5 percent last year, before gaining about 1 percent so far in 2017.

Seven of the 59 rated by Moody’s would be vulnerable to downgrades, including five property developers, it said:

  • Greenland Holding Group Co. Ltd. and unit Greenland Hong Kong Holdings Ltd.
  • Country Garden Holdings Co. Ltd.
  • Shimao Property Holdings Ltd.
  • Hydoo International Holdings Ltd.

Also seen at risk:

  • West China Cement Ltd.
  • United Photovoltaics Group Ltd., a solar power plant investor and operator

The companies wouldn’t be able to “absorb the adverse effects on their leverage and interest coverage,” said Moody’s analysts including associate managing director Simon Wong and analyst Anthony Lee.

Source: Moody’s Investor Service

“The vulnerability is mainly driven by their fundamentals, which are reflected in their limited cushion under their downgrade triggers,” Wong said in an interview. Greenland HK is vulnerable because its rating is linked to that of its parent Greenland Holding Group, he said.

“Greenland Holding’s ratings will remain under pressure unless the company reduces its total outstanding debt by issuing a significant amount of equity or selling assets, or achieves sustained contracted sales growth or significantly slows down land and other acquisitions,” Moody’s said.

Greenland didn’t immediately respond to requests for comment.

Moody’s last downgraded Greenland Holding and Greenland HK in May 2016, while it lowered West China Cement one step to B1 in August, the same month it released its previous report on Chinese high-yield companies’ ability to manage a 10 percent decline in the yuan. Then, 10 of 55 rated companies were deemed vulnerable. Eight were property developers.

Source: Moody’s Investor Service

The offshore bond market remains important for funding, especially as onshore channels to support land acquisitions have tightened.

With the consensus outlook for the yuan to avoid a 10-percent-scale drop, investors are happy to buy the dollar bonds. Most of the vulnerable companies that issued recently are “repeat issuers with good track records and known to investors,” Moody’s said.

In a report released Monday, the rating agency said it expects the default rate for high-yield non-financial corporates in Asia to be low this year, at 3.1 percent, partly thanks to the accommodative monetary policy of central banks, bar the Federal Reserve, and solid growth in the U.S. and China.


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