Defaults further intensify in the second half of 2020, with the default balance of highly rated SOE bonds at an all-time high.
2020 is coming to an end. If there is anything more alarming about the Chinese bond market in 2020, it is the massive debt defaults. Defaults in the second half of 2020 intensified, with the default balance of highly rated SOE bonds at an all-time high.
According to Wind statistics, as of December 18, 2020, a total of 27 new entities defaulted this year, with a total of 164 bonds in substantial default, and the cumulative amount of bond defaults exceeded 160 billion yuan (RMB, the same below). Among them, the default balance of state-owned enterprises increased from 12.93 billion yuan in 2019 to 51.897 billion yuan this year, an increase of three times.
In addition, the number of defaults on AAA-rated bonds has surged significantly since 2020. As of December 18, according to Wind statistics, since the first default in the debt market in 2014, more than 70 bonds with AAA main ratings at the time of issuance have materially defaulted in 6 years. Among them, more than 50 have been issued since this year alone, accounting for more than 70%.
The Economic Observer reported on Dec. 19 that from the perspective of defaulting subjects, not only small and medium-sized enterprises, but also individual large state-owned enterprises can not escape the crisis of liquidity depletion, the second half of the year, large state-owned enterprises increased the number of mines, bond default situation further deteriorated.
According to statistics, a total of eight SOEs have defaulted so far this year, although only one more than in 2019, but the balance of defaulted bonds of highly rated SOEs is at a historical high, increasing from 12.93 billion yuan in 2019 to 51.897 billion yuan this year.
The defaulting subjects involved almost all industries. Data show that as of December 18, 2020, there are 27 new defaulters, distributed in 13 industries (classified by Shenwan level), including general, automotive, construction and decoration, utilities, real estate, medicine and biology, communications, extractive, commercial trade, agriculture, forestry, animal husbandry and fishery, machinery and equipment, electronics and media.
The failure of the “risk-free” label of “state-owned enterprises + high ratings” has shocked the market, especially the recent default of AAA-rated state-owned entities such as Brilliance Auto, Yong Coal Holdings and Ziguang Group, which has completely broken the bond market’s faith in state-owned enterprises and highly rated bonds.
According to the statistics of the Economic Observer, since the first default in the bond market in 2014, a total of 46 bonds with AAA rating at the time of issuance have defaulted substantially in 6 years. Among them, there are 32 only since this year, accounting for nearly 70%.
Guosheng Securities said in an analysis of the reasons for the explosion of state-owned enterprises, on the one hand, is due to the impact of the epidemic affects the cash flow of business operations, making enterprises pay off short-term debt pressure increased, investors risk aversion rose, low-quality enterprises face refinancing difficulties.
On the other hand, it is because of the tight local financial situation in the second half of the year, the local government’s ability to coordinate underwriting and coordination and the marginal decline in the scope of coordination, poor profitability and debt-ridden large state-owned enterprises began to gradually burst mines.
Guosheng Securities expects that in the general context of future credit contraction, the phenomenon of default mines may continue.
Compared with last year, the defaults of private enterprises have improved in 2020. However, the default balance is still at a high level, reaching 60.374 billion yuan.
According to the statistics of Everbright Securities, the trend of a large number of defaults on private enterprise debt has improved significantly this year since the concentrated default of bonds in 2018. Since the beginning of the year, all new defaulters are mostly private enterprises, a total of 18, but compared with the same period last year, 34 defaulted private enterprises have a large reduction, while the balance of defaulted bonds also has a large drop, so far this year, the balance of defaulted private enterprises 60.374 billion yuan, down 45% year-on-year.
Shanghai Securities Institute said that, in general, changes in the economic environment lead to changes in the credit environment, never credit defaults are highly correlated with the economic cycle, and credit defaults usually increase during economic downturns.
GF Securities said, compared to private enterprises, state-owned enterprises bond default uncertainty is greater, depending on the game of enterprises, government, financial institutions and other related parties, and once the default, due to the previous excessive tilt of financial resources, resulting in the accumulation of long-term risk, often bringing greater losses to creditors.
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