| BEIJING, April 3
BEIJING, April 3 China's rating agencies are
likely to keep a long-held assumption of government bailouts
built into most ratings despite the country's first domestic
bond defaults and warnings from Beijing that there is no blanket
guarantee of support.
Last month, Shanghai Chaori Solar Energy Science and
Technology (Chaori), defaulted when it missed an
interest payment on a bond, and this week a newspaper reported a
small construction materials company had also defaulted on an
The central bank and government have both indicated in
recent weeks that they are prepared to tolerate some failures as
they reform financial markets.
Chen Dongming, chief credit officer at China Lianhe Credit
Rating, which has global rating agency Fitch as a shareholder,
said Chaori was not a harbinger of larger defaults that posed a
Roughly 90 percent of publicly issued bonds are issued by
large or mid-size state-owned enterprises which are still likely
to get government assistance, Chen said.
"Their likelihood of getting bank capital or government
support is still a lot higher than for a private enterprise," he
Until now, it had been widely assumed that even
high-yielding debt carried an implicit state guarantee so there
was little incentive for investors to demand ratings that
For example, Chaori narrowly avoided a bond default in
January 2013 after a Shanghai district government persuaded
banks to defer claims for overdue loans.
"A lot of local investors were not looking at ratings
agencies' reports, but were just looking at the yield, thought
that no company would ever default in China, and looked at who
distributed the bonds," said Geoffroy Wallier, the managing
partner of OrfiCapital, a Hong Kong-based asset management firm
that invests in offshore Chinese corporate bonds.
Any fallout from Chaori's default is expected to be seen
most in the ratings of smaller private firms, as investors
become more aware of the need to price in risk.
"Chaori's default is a warning," Guan Jianzhong, CEO of
Dagong Global Credit Rating Co, which did not rate Chaori, told
Reuters. "We'll draw lessons from it, and improve our ratings
system and standards."
Chaori's default is having an impact in the secondary
market. Yields on AA- five-year medium-term notes have shot up
more than 50 basis points, while yields on safer AA and AAA
medium-term notes have remained steady.
But exactly how it will change the broader industry is not
clear, particularly as investors and rating agencies still
expect favourable treatment for state-backed firms.
When Chaori filed a bond prospectus in March 2012, Pengyuan
Ratings said its "current orders are comparatively full, and
future business has definite surety."
Indeed, Chaori had only days earlier forecast its 2011
profits at 83.5 million yuan. But, after the bond sale opened,
its annual report revealed a loss of 54.8 million yuan.
Still, in June 2012, Pengyuan re-rated Chaori and its bond
AA, while acknowledging the company's "profits have fallen
substantially, debt has grown substantially, and liability
pressure has enlarged."
On its website, Pengyuan defines AA as "very strong ability
to repay debt, low vulnerability to foreseeable events, very low
risk of default."
Pengyuan eventually downgraded Chaori three times in five
months, ending at the CCC rating in May 2013.
Pengyuan declined to comment when contacted by Reuters.
PLEASE THE ISSUER
Around half a dozen rating firms dominate the Chinese
market, and a debt issuer only needs a rating from one agency.
Most agencies don't publish detailed methodologies, which leaves
investors with little to judge the quality of the ratings.
"We are a bit worried that local agencies want to please the
issuer," Wallier of OrfiCapital said.
This is not an issue just in China -- in the aftermath of
the 2008 global financial crisis, major international credit
rating agencies have been accused by investors, regulators and
politicians of inflating the ratings of risky mortgage-backed
and structured securities in a bid to win new business.
Fitch and the other two leading global credit rating
agencies, Moody's Investors Service and Standard & Poor's,
aren't licensed to rate onshore debt in China, although each has
a relationship with a local firm.
Ivan Chung, chief credit officer in Hong Kong for Moody's,
which has a minority stake in China Chengxin International
Credit Rating, said a weakness in the Chinese market was that
debt subordination and creditor priority were generally not
reflected in ratings.
"If you continue to be inaccurate or cannot meet the
expectations of investors, your market position will
progressively weaken," Chung said.
Guan the CEO at Dagong, was confident of avoiding that fate.
"Our methodologies are constantly changing," he said.
"Dagong isn't going to have a problem like Chaori."
(Additional Reporting By Pete Sweeney; Editing by John Mair)