By Nathaniel Taplin
Investors in dollar debt backed by one of China’s largest cities may find themselves with a much shorter haircut before the winter holidays. One date to watch: Dec. 16.
Chinese state-owned enterprises have occasionally punted on yuan-denominated debt, but offshore defaults are far rarer.
Investors have therefore viewed SOE dollar debt as more or less a sure thing. Any change to that assumption could mean higher refinancing costs for local governments, leading to more defaults and making it harder to shore up tepid infrastructure investment at home.
A proposal by Tewoo Group, a commodity trader owned by the Tianjin government, to restructure $1.25 billion of offshore notes now threatens to make this scenario a reality. According to Tewoo’s late-November proposal, investors would accept a write-down of around 60%—or new longer-dated bonds with lower coupons. A $300 million payment is due Dec. 16.
The looming deadline comes as Chinese local governments have been on an offshore borrowing binge. Local government financing vehicles had, by early December, issued a record $5.19 billion of high-yield dollar bonds in the second half of 2019, according to Debtwire, 9% more than in the entire first half. Nearly 80% of the total is for refinancing.
Tianjin is something of a special case, with some of the nastiest debt dynamics in the country. Photo: Feng Jun/Zuma Press
Tianjin itself is something of a special case, with some of the nastiest debt dynamics in the country thanks to years of overinvestment and overreliance on slow-growing, old-economy smokestack industries.
China think tank MacroPolo earlier this year calculated that Tianjin’s government-financing-vehicle debt equaled 102.5% of its annual economic output, against an average for all provinces of just 61.7%. Tewoo’s troubles have also been apparent for some time. A company subsidiary missed a payment on an onshore bond in July.
Still, that doesn’t mean investors in dollar bonds from state-backed companies in other provinces might not be in for nasty surprises too. Local governments that might normally bail out their champions are hurting. Big tax cuts over the past year have squeezed revenue. Land prices have begun cooling along with the real-estate market, hitting a main source of nontax revenue.
As a whole, state-owned enterprises that are held at the local level are struggling, in part because many of them are in property-related industrial sectors. In the first 10 months of 2019 their profits were up only 1.6% on the year—down from 6.3% growth for the first nine months. And refinancing options outside the bond market have dried up in late 2019, as growth in bank lending has slowed again.
More haircuts for Chinese dollar debt could be ahead—or else close shaves.
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