More Chinese corporate defaults likely in 2016
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More Chinese corporates are expected to default on their bonds next year, following a record number of defaults in 2015, said Standard & Poor's Ratings Service.
"We see a low likelihood that corporates' credit metrics will stabilise over the next 12 months, due to the downside risk to investment demand," said Standard & Poor's credit analyst Christopher Lee. "Companies are under increased pressure to preserve cash flow and restore financial strength
because of sluggish demand. This will force many corporates to cut costs and capital spending, which will have a knock-on effect on aggregate demand and continue to strain corporates' cash flow."
China's economy is in the middle of major transition in light of global financial crisis that forces the country to focus more on domestic consumption than exports.
Standard & Poor's noted that the debt-servicing among Chinese issuers is fairly weak.
Based on its study of the top corporates in China, the leverage of corporate issuers is expected to weaken in 2015, with a ratio of debt to EBITDA to 5 times in 2015, compared with about 4.5 times in 2014. At the end of 2008, this ratio was about 2.6 times, a more manageable level. Leverage of 5 times is the threshold for "highly leveraged", it noted.
"The sectors most at risk of defaults are those that have high operating leverage, high debts, and overcapacity, such as metals and mining, real estate developers, transport, and building materials," said Lee.
For defaults in 2015, most of the defaulters "Most of the defaulters suffered from weak cash flows and high leverage, as indicated by deteriorating credit metrics. In several cases, issuers took on
too much debt for expansion during the boom and met with sharply weakened market conditions, such as those operating in the commodities, transportation-cyclical, and real estate markets.
