Breaking News
0

China's Rising Defaults Bring More Safeguards to Yuan Bonds

EconomyJul 13, 2018 12:40
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. China's Rising Defaults Bring More Safeguards to Yuan Bonds

(Bloomberg) -- A record pace of defaults in China has triggered greater application of safeguards to local bonds, a silver lining for investors looking for some protection.

The ratio of domestic bonds with a cross-default covenant, which puts a borrower in default of other debt if it fails payment on one bond, has surged to 82 percent of all company notes sold this year. That’s up from almost zero five years ago. China has been encouraging a market-driven approach to the pricing of risk in its bond market -- the world’s third largest -- and inclusion of the provisions bring onshore practices closer to international ones.

“The proliferation of cross-default clauses is in line with investors’ increasing awareness of credit risk in recent years,” said James Hu, a senior portfolio manager at Income Partners Asset Management (HK) Ltd. “As the onshore bond market opens to foreign investors, the market practice becomes more internationalized and matured.”

Bonds sold offshore typically come with safeguards or covenants that protect investor interest by limiting the amount of debt a firm is allowed to borrow, potentially curbing losses. Over the past few years, more yuan corporate-bond issuers have added debt covenants, but it’s the cross-default clause that’s seen the highest adoption rate.

READ: China Onshore Corporate-Bond Defaults Reach 22.2 Billion Yuan

A recent example of such a clause being activated was the case of Wintime Energy Co. Its default on a 1.5 billion yuan ($220 million) bond on July 5 triggered cross-default on 13 of its bonds, totaling 9.9 billion yuan, according to a public filing. Last year, missed payments by companies such as Dalian Machinery Tools Group Corp. and Yiyang Group Holdings prompted defaults on their other debt.

Here are some perspectives on bond protections in China:

Ivan Chung, head of greater China credit research in Hong Kong at Moody’s Investors Service:

  • The cross default clause puts bond investors on equal footing with other creditors in taking actions against issuers.
  • The provision can also “aggravate the financial plight and bankruptcy risk of the defaulted issuers, as one default will trigger early repayment of all debt obligations with this clause”
  • The contagion impact on related companies will be much larger through cross-default clause, including those that financially stronger and have little debt due in the short term

Cary Yeung, Hong Kong-based head of greater China debt at Pictet Asset Management:

  • The increasing use of cross-default clauses will bring “more participation from foreign investors in the long run.”

Edmund Goh, Asia fixed-income investment manager at Aberdeen Standard Investments in Singapore:

  • It’s particularly advantageous when the cross-default clauses are attached to onshore bonds issued by the corporate entity that holds the group’s core assets.

China's Rising Defaults Bring More Safeguards to Yuan Bonds
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email