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