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Announcement:

Moody's: Latest Chinese SOE debt restructuring points to differentiated levels of government support

 The document has been translated in other languages

21 Apr 2016

Hong Kong, April 21, 2016 -- Moody's Investors Service says that the proposed debt restructuring of state-owned China Railway Materials Company Ltd (CRM, unrated) signals the Chinese government's (Aa3 negative) declining direct support for state-owned enterprises (SOEs) that are not strategically important and that operate in competitive sectors.

Moody's expects the central government's increased tolerance for SOE defaults will prompt more caution among onshore investors and banks in lending to such companies, in turn raising their costs of funding, particularly for weaker SOEs.

"CRM's proposed debt restructuring is in line with our view that debt restructuring will become the norm in resolving the debt burden of financially distressed SOEs in overcapacity sectors," says Ivan Chung, a Moody's Associate Managing Director.

"Coupled with other SOE defaults over the past year, we expect the standalone fundamentals of SOEs and differentiated assumptions of government support will increasingly drive the lending and credit decisions of banks and investors," adds Chung.

Chung was speaking on Moody's just-released report on China's credit market, titled "China Credit Market: China Railway Materials' Debt Restructuring Points to Increasingly Differentiated Government Support".

Although CRM has not missed any interest or principal repayments on its bond, the company on 11 April 2016 applied to suspend the trading of its RMB16.8 billion (USD2.6 billion) outstanding bonds, and is currently negotiating a restructuring of this debt with its major creditor banks.

The debt restructuring follows several defaults of other SOEs over the past year, including that of Baoding Tianwei Group Co., Ltd (unrated) in April 2015, that of Sinosteel Corporation (unrated) in October 2015, and that of Shanxi Huayu of ChinaCoal Co. Ltd (unrated) in April 2016.

Moody's says these developments are in line with its view that China's central government will only provide support to financially distressed SOEs that meet certain criteria, namely those that are engaged in activities closely aligned with an important national policy, or whose default could have wider systemic implications.

Thus, while government ownership in the past was often sufficient to ensure good access to the capital markets for SOEs, even for those with weak credit metrics, Moody's believes the credit events and defaults among SOEs in recent months have markedly changed the assessments by investors and banks.

The resultant caution in lending to or investing in these companies, depending on their assessed level of government support, could lead to increasingly differentiated credit costs for SOEs and raise refinancing risk.

Reflecting this trend, Moody's points out that cancellations in monthly bond issuance have increased sharply since January 2016.

Subscribers can access the report at https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1024493

The report may also be found through this link to Moody's topic page titled China — Reform and Rebalancing: http://www.moodys.com/chinarebalancing. The topic page provides subscribers with a centralized source for Moody's research related to key credit issues in China, as the country's rebalancing story unfolds.

Recent Moody's publications relating to China Reform and Rebalancing include:

• Chinese Diversified Technology Sector: Resilient Amid China's Economic Rebalancing

• Chinese Banks: 2015 Results Show Continued Pressure on Asset Quality and Profitability

• Regional and Local Governments -- China: Assessing the Standalone Credit Profiles of Lower-Tier Chinese RLGs

• Oil and Gas -- China: National Oil Companies' Aa3 Ratings Confirmation Reflects Strong Government Support and Financial Flexibility

• Auto ABS -- China: Answers to Frequently Asked Questions About Performance

• Measures to Cool China's Hot Property Markets Are Credit Negative for Developers

• Chinese Overcapacity Sectors: Financial Pressure Tests Implicit Local Government Support

• Property -- China: Developers Face Credit Negative Effects from Measures to Dampen Price Surge in Shanghai and Shenzhen

• China Property Focus -- March 2016

• Automakers -- China: Sales Growth to Accelerate in 2016 with Vehicle-Tax Cut buw Slow in 2017

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Ivan Chung
Associate Managing Director
Greater China Credit Research
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Michael Taylor
Managing Director
Credit Strategy
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's: Latest Chinese SOE debt restructuring points to differentiated levels of government support
No Related Data.
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