Hong Kong, August 16, 2016 -- Moody's Investors Service says that 82% of the 55 high-yield
non-financial property and industrial companies that it rates in
China (Aa3 negative) have sufficient buffers or mitigants in place to
help them manage the adverse effects of a 10% hypothetical depreciation
of the renminbi against the US dollar from the level at the beginning
of 2016.
But 10 companies — eight property developers and two industrial
companies — are more vulnerable to negative rating actions in Moody's
depreciation scenario because they have limited cushion under their rating
triggers or lack significant mitigants to withstand such a depreciation.
Moody's analysis is contained in its recently-released report
titled "High-Yield Non-Financial Companies — China:
Most Rated Companies Can Manage Foreign Currency Debt Exposure".
On property developers in particular, Moody's report says
that 28 of the 36 high-yield developers that it rates show a manageable
foreign currency debt exposure or cushion to buffer against a 10%
weakening of the renminbi.
For these companies, the impact on their credit metrics —
such as revenue/adjusted total debt — of a lower renminbi can be
accommodated in their ratings. In addition, the companies
show long-dated maturity profiles, adequate liquidity or
healthy contracted sales growth. These factors provide additional
cushion for the companies to absorb a potential depreciation without severely
weakening their credit quality or ratings.
Moody's expects many of the rated developers will continue to proactively
manage down their foreign currency exposure through tapping the onshore
funding channels.
Among the remaining eight property developers, four with negative
outlooks or ratings under review for downgrade are already weakly positioned
in their ratings category and have limited cushion under their rating
triggers. For the other four developers with stable outlooks,
Moody's expects that improvements in their 2017 operating performance
will provide them with mitigants against a potential depreciation.
Of the 19 industrial companies that Moody's rates in China,
14 are well positioned to withstand a 10% depreciation of the renminbi.
These 14 companies have some foreign currency revenues, long-dated
maturity profiles, good liquidity, stable operating performance,
likely parental support or a combination of these factors. For
another three, foreign currency risk is already reflected in their
low ratings.
The remaining two industrial companies are more vulnerable to negative
rating actions. These companies show weak operating fundamentals
with limited or no headroom under their ratings triggers to a deterioration
in leverage, as a result of a currency depreciation.
The 55 Moody's-rated high-yield Chinese non-financial
companies had around $277 billion of debt outstanding at end-2015,
$83 billion (30%) of which was denominated in foreign currency.
Debt denominated in US dollars and Hong Kong dollars accounted for the
bulk ($79.4 billion) of the total foreign currency exposure.
The renminbi depreciated 4.6% against the US dollar through
31 December 2015, following China's exchange-rate reform
in August 2015, and by a further 2.2% year-to-date
to 10 August 2016.
Overall, Moody's expects that China will continue to apply
existing capital controls rigorously over a prolonged period, such
that any currency devaluation over the next 12 months will likely occur
in a controlled manner.
This hypothetical scenario in which the renminbi depreciates up to 10%
against the US dollar from the level at the beginning of 2016 is not Moody's
base case scenario or expectation. The 10% is used to test
the resilience of the Chinese corporates that Moody's rates to this
level of renminbi depreciation.
Subscribers can access the report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1037664.
The report may also be found through Moody's topic page "China's
Trilemma: Growth, Reform and Stability", available
at http://www.moodys.com/chinarebalancing.
This page provides a centralized source for Moody's research related to
key credit issues in China as the country's macroeconomic story continues
to unfold.
Recent Moody's publications relating to China's Trilemma include:
• China Credit Market: Wuhan Guoyu's Liquidity Crunch Tests
Investor Protection in China
• Chinese Proposal to Regulate Banks' Wealth-Management Products
Is Credit Positive
• China Ports: Slower Economic Growth Is Challenging the Sector
• China Credit: Spillover from Potential Dislocation in Onshore
Bond Market Would Be Limited
• China City Construction's Default Will Impede Offshore Issuance
• RMBS - China: Answers to Frequently Asked Questions
About Housing Provident Fund RMBS
• Quarterly China Shadow Banking Monitor
• China Property Focus - July 2016
• Inside China - July 2016
• China's Revised Rules for Insurers' Infrastructure Investments
Are Credit Negative
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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.
Franco Leung
VP - Senior Credit Officer
Corporate Finance Group
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
Gary Lau
MD - Corporate Finance
Corporate Finance Group
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