Cash-strapped Chinese firms seek new ways to raise money

Chinese firms have been trying to find new ways to borrow as they weather the worst economic slowdown in a quarter of a century, with government measures to rein in risks in financial markets tightening their access to credit.
Chinese firms have been trying to find new ways to borrow as they weather the worst economic slowdown in a quarter of a century, with government measures to rein in risks in financial markets tightening their access to credit.PHOTO: BLOOMBERG

BEIJING • Cash-strapped Chinese companies are ramping up sales of asset-backed securities (ABS) to raise funds as they face record delays in collecting payments from customers.

Structured note sales backed by assets such as receivables jumped 130 per cent to 455.2 billion yuan (S$94.3 billion) last year, based on official data released on Monday.

They accounted for 54 per cent of all asset-backed securities issued in China, up from 33 per cent in 2015.

By comparison, notes backed mainly by bank loans, which used to constitute the bulk of ABS issuance, fell 4.6 per cent last year, according to the data.

Chinese firms have been trying to find new ways to borrow as they weather the worst economic slowdown in a quarter of a century, with government measures to rein in risks in financial markets tightening their access to credit.

Corporate bankruptcies in China jumped an estimated 20 per cent last year and will likely rise 10 per cent this year, according to estimates from Euler Hermes Group.

Sales have also been fuelled by government support for companies to monetise assets and increase cash flow.

"Companies in China, especially the private sector, are having a hard time getting financing," said executive director Wang Xuebin at the investment banking arm of JPMorgan First Capital Securities. "The jump in ABS issuance was also driven by the fact that corporate bond sales became harder in the second half of 2016."

In addition to issuing ABS, companies are selling unpaid customer bills to financial firms in order to fill the funding gap.

Investors have been demanding higher yield premiums to hold bonds since the beginning of October as tighter monetary conditions triggered an unwinding of leverage by banks and brokerages.

The average yield premium of top-rated five-year local corporate over government bonds rose 50 basis points last year, the most since 2011. By comparison, the spread on AAA-rated five-year ABS widened 40 basis points over sovereign notes, ChinaBond data showed.

"As the economy slows, ABS investors could face higher risks if the underlying assets are heavily related to the real economy, such as account receivables and beneficiary rights," said general manager Li Yan of the structured finance department at China Chengxin International Credit Rating.

For some investors, the credit quality of the company ultimately sponsoring the ABS deal is what matters because of risks around the collateral.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on January 12, 2017, with the headline 'Cash-strapped Chinese firms seek new ways to raise money'. Print Edition | Subscribe