China Junk Bonds Pose Most Risk Since ’04 on Credit-Quality Dips

Investors in Chinese junk bonds take the biggest gamble in at least a decade.

Lever to junk status of Chinese enterprises is at its highest since at least 2004, whether measured by gains on interest costs or total debt to a measure of cash flow, according to data compiled by Bloomberg using an index Bank of America Merrill Lynch. Borrowers have also piled on more debt relative to their assets since 2007.

The deterioration in the credit quality coincides with the lowest annual growth since 1990, Asia's largest economy, and helps explain why Fitch Ratings Ltd. predicted default will climb. It's bad timing for bond investors who swallowed a record $ 209.2 billion Chinese society Notes denominated in either dollars, euros or yen last year, Bloomberg data show.

"The Chinese credit cycle has peaked," said Hong Kong-based Arthur Lau, the fixed income head for Asia ex-Japan at PineBridge Investments Asia Ltd., which manages $ 35.3 billion debt worldwide. "Corporate profits are generally negative and investors are preparing for a deterioration in action."

The typical high-yield corporate China earned an average of 2.7 times the interest they paid in 2014 and has approximately 35.5 times more debt than their annual operating income, according to data compiled by Bloomberg from the data of the index Bank of America Merrill Lynch. The average debt taken by the 65 companies in the index climbed to 34.3 percent of assets.

Jump Payments:

Over the past month, developer Kaisa Group Holdings Ltd. and coking coal importer Winsway Enterprises Holdings Ltd. both missed payments of bond coupons, and Sound Global Ltd. Water Treatment Company potential audit issues reported. Hotpot restaurant firm become cloud Live Internet Technology Group Co. also became the second-defaulting debt still onshore in China after failing to
repay the Noteholders.

China's debt has exploded amid soaring bad loans and declining industrial profits. Overall social financing, credit measure covering traditional sheet and off-balance sheet loans, increased to double the gross domestic product of China at the end of December. While that is below the peaks reached earlier last year, it is close to the highest since Bloomberg began tracking the data in 2003.

"When credit is growing so fast, it's normally a strong misallocation of capital signs have occurred," Sander Bus, head of high-yield loans, and Victor Verberk, investment-grade credit of the head, the manager Dutch Robeco Groep NV, wrote in April 1 10 E-mail.

Downgrades:

"We would not be surprised if China and some other emerging countries that face similar increases in the debt turns out to be the location of the third episode of the global financial crisis, after the United States and Europe," they write. Robeco had about 246 billion euros ($ 260 billion) in assets at the end of 2014.Moody's Investors Service lowered the ratings of Chinese companies rated unwanted 11 times in the first three months of 2015 and updated once, Bloomberg data show. The report is the worst since at least 2006.

"There are two reasons for deterioration, one is that companies take too much debt and the other is that the operating environment is deteriorating," said Joep Huntjens, head of Asian debt Dutch NN Group NV, which was about $ 197 billion under management at December 31. "What is happening in China is this, many companies suffer from excess capacity."

Prospect Stimulation:

Moody's said on March 11 that 5.1 percent of high-yield corporate brand in China she had missed in 2014. The number of defaults increased to five in 2014, two in 2013, pushing the default rate of leakage 12 High Yield months for Asia nonfinancial businesses to 3.9 percent, against 2.2 percent the previous year.The rating company lowered Yingde Gases Group Co. by a step to Ba3 January 27, citing challenges in low steel industry. The ratio of debt to assets Yingde increased by 53.6 percent at the end of the year from 49.7 percent in 2013.

While corporate profits "will not be this nice over the next six months," Nikko Asset Management Ltd is more positive on high yield bonds because China can strengthen its monetary and fiscal stimulus, according bonds high efficiency, a Singapore-based manager Wai Hoong Leong. People's Bank of China Governor Zhou Xiaochuan said in a speech last month, there is still room for action for monetary policy then Premier Li Keqiang, which set a target of around 7 percent against 7 4 percent last year 2015 growth is committed to take action if the expansion slows toward the lower end of this range.