Rated Chinese Firms Have Limited Exposure to Trust Loans, Says Moody's

Moody's Investors Service says that while a default in China's trust loan market will likely raise interest costs and tighten the availability of such debt as a source of funding, trust loans only accounted for about 4% of Moody's-rated Chinese corporates' outstanding debt at end-2013.


"Moreover, while trust loans are one of the main funding sources for Chinese property developers' land acquisitions, owing to regulatory restrictions and tight credit from Chinese banks, the developers' exposures to the risk of trust loan defaults is manageable," says Kaven Tsang, a Moody's Vice President and Senior Analyst.


Moody's analysis is contained in its just-released report titled "Most Rated Chinese Corporates Will See Little Impact from Trust Loan Market Tightening," and is co-authored by Tsang, and Alan Gao, a Vice President and Senior Analyst.


The report points out that about 61% of Moody's-rated property developers (27 of 44 companies) have trust loans on their balance sheets.


These loans represented around 12% or approximately RMB1.3 trillion in debt at end-2013.


Moody's also estimates that 18 of the 27 developers have trust loans representing 10% or more of their total debt.


In addition, only three rated developers have both material exposures to trust loans and weak liquidity, namely: Hopson Development Holdings Limited (B3 stable), Coastal Greenland Limited (B3 negative) and Glorious Property Holdings Limited (Caa1 negative).


Moody's says the other developers with material exposure to trust loans, such as China Vanke Co Ltd (Baa2 stable), Dalian Wanda Commercial Properties Co Ltd (Baa2 stable), Evergrande Real Estate Group Limited (B1 stable) and China Aoyuan Property Group Limited (B2 stable), have good access to funding or sufficient liquidity to meet their refinancing needs in the next 12 months.


"However, over the longer term, if the trust loan market is closed to property developers, it would reduce funding channels for land acquisitions and other needs; especially for small developers," says Tsang.


As for rated non-property Chinese firms, Moody's report says the vast majority (70%) of such corporates are state-owned and/or companies in non-cyclical industries, including retail, Internet and consumer goods.


These companies therefore have good access to funding and do not need to raise money through expensive trust loans.


In addition, while several Moody's-rated non-property corporates have outstanding trust loans -- including Yingde Gases Group Co Ltd (Ba2 stable) and the property unit of AVIC International Holding Corporation (Baa3 stable) -- these loans account for a small percentage of these companies' total outstanding debt.


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