Fallen angels incoming as US$23b of China bonds near junk

FEB 3, 201610:48 AM

[HONG KONG] Investors need to watch out for so-called fallen angels from China as a slowing economy prompts debt rating companies to cut more investment-grade issuers to junk.

Standard & Poor's has downgraded 15 Chinese companies this year and upgraded one, the worst ratio in Bloomberg data going back to 2006. Some US$22.6 billion of offshore bonds from the nation are now rated one step above junk by any of the three major rating agencies, Bloomberg-compiled data show. 

Hong Kong-based commodity trader Noble Group Ltd's 3.625 per cent 2018 notes nosedived 18 cents on the dollar since its senior debt was cut to junk by Moody's Investors Service on Dec 29.

"I won't be surprised to see more companies downgraded to junk," said Raymond Chia, head of credit research for Asia ex-Japan in Singapore at Schroder Investment Management Ltd with assets of about US$446.5 billion under management.

"Clearly fallen angels have impact on markets, for instance funds with high- grade mandates could be forced to reduce junk holdings. Most importantly, investors have to do a lot more fundamental work for those names."

Chinese corporations, the largest international bond issuers in Asia with US$373 billion securities outstanding, face more challenges servicing their debt amid the weakest economic growth in a quarter century.

The yield premium on the 7.25 per cent 2024 notes of Dalian Wanda Commercial Properties Co, which is controlled by China's second richest man Wang Jianlin, spiked 47 basis points after S&P cut the debt to junk Tuesday. The firm forecast sales will fall 32 per cent this year.

The credit agency changed Sino-Ocean Land Holdings Ltd's outlook to negative from stable last week on potentially weaker financial leverage and interest coverage ratios. About three quarters of BBB-rated Chinese notes are from the nation's developers.

"Credit quality for Chinese companies will continue to deteriorate this year," said Christopher Lee, managing director of corporate ratings for Greater China at S&P in Hong Kong.

"Many sectors are experiencing weak cash flows and pressure on debt servicing because of softer pricing caused by overcapacity, and a slowdown in China's economy."

China's central bank on Tuesday said it will allow banks to cut the minimum required mortgage down payment to 20 per cent from 25 per cent for first-home purchases as it steps up support for the property market.

Reviving investment in real estate is crucial for the government, which cut interest rates six times since late 2014.

Shanghai government-backed Greenland Holdings Corp Ltd is one of two Chinese issuers that Moody's has rated at the lowest investment-grade with a negative outlook. The other firm is state-owned China National Gold Group Corp.

Moody's currently rates 20 Chinese companies one level above junk. Among them, 20 per cent had negative outlook or were on review for downgrades compared with 5 per cent at the end of 2014.

"Fallen angels are a major risk for investors this year," said Owen Gallimore, a credit analyst at Australia & New Zealand Banking Group Ltd.

"What's surprising the market is that the actions rating agencies are taking are dramatic and may not end there. There is a mini panic."

Some 40 per cent of 2015 downgrades on China credits happened in the fourth quarter for Moody's, according to Clara Lau, group credit officer for credit policy at the agency in Hong Kong.

"We believe the downgrade trend will continue due to our negative outlook for China's economy," Ms Lau said.

BLOOMBERG