Onshore Bond Default Will Have Limited Impact on Chinese Corporates, Says Moody's

Moody's Investors Service says that the Chinese non-financial companies it rates will see little effect from the 7 March default by Shanghai Chaori Solar Energy Science & Technology Co. (unrated), because their exposure to any follow-on tightening in China's onshore bond market is limited.


Publicly traded onshore bonds accounted for around 26% of the approximately RMB5.1 trillion in outstanding debt for these companies at year-end 2013, according to Moody's estimates.


"The vast majority of these bonds were issued by state-owned entities (SOEs), which we believe will maintain their access to onshore and offshore funding sources, given their government links," says Kai Hu, a Moody's Vice President and Senior Credit Officer.


Hu was speaking on the release of a new special comment entitled "Rated Chinese Corporates Will See Few Shocks from Onshore Bond Default."


Solar cell manufacturer Chaori Solar failed to make the full RMB89.8 million interest payment due 7 March on its outstanding RMB1 billion corporate bond. It is the first default of a publicly traded bond in China's onshore market since 1997.


Onshore bonds account for about one third of the RMB4 trillion in total outstanding debt for the rated SOEs, according to Moody's year-end estimates.


"We don't believe the default by Chaori Solar, a relatively small private enterprise that has a weak credit profile and has been close to a default since last year, will weaken the market's perception on implied governmental support for SOEs," adds Hu.


Moody's expects bond investors will likely maintain their strong appetite for bonds issued by SOEs, but may shy away from debt issued by fundamentally weak private companies.


The five SOEs with the largest amount of onshore bonds outstanding represent about 82% the rated portfolio's total onshore bonds outstanding. They are China National Petroleum Corporation (Aa3 stable), State Grid Corporation of China (Aa3 stable), CITIC Group Corporation (Baa2 stable), China Three Gorges Corporation (A1 stable) and China Petrochemical Corporation (Aa3 stable).


As these companies are strategically important to China, Moody's believes that they will continue to have good access to a variety of funding sources.


Furthermore, onshore bonds account for a relatively small portion of non-SOEs' outstanding debt, limiting the non-SOEs' exposure to any market tightening.


About half of the non-SOE onshore bond issuance (RMB13.5 billion) was from one corporate group, Fosun International Limited (Ba3 review for downgrade). Moody's also expects that the company and its subsidiaries will be able to refinance their debt in case of bond market turmoil given the entities' good track record of accessing diversified funding channels.


The Chinese government and state-owned banks did not step in to bail out Chaori Solar, as they have done for other companies in the past. The lack of intervention is consistent with the central Chinese government's adoption of more market-oriented policies, which include increased tolerance for corporate bond defaults, as it reforms the country's financial markets.


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