S&P sees more Chinese defaults in 2020 as maturities loom

SHANGHAI, Jan 16 (Reuters) - More Chinese companies will default on bond payments in 2020 as they face a wall of maturities, higher financing costs for weak issuers and a government less inclined to bail them out, rating agency S&P Global said in a report Thursday.

Following a year of record defaults in 2019, S&P said it expected defaults to rise even further as Chinese firms face 6.5 trillion yuan ($945 billion) in effective maturities in 2020. That figure includes put options that allow investors to demand early repayment but does not include short-term debt that will be issued and come due within 2020.

Local government financing vehicles (LGFV) face the most repayment pressure, with about 2 trillion yuan in effective maturities, S&P said.

Issuers will also face offshore maturities of more than $90 billion.

While strong issuers are unlikely to face significant pressure, weak companies “are not getting financing at costs and durations needed for a sustainable capital structure,” the report said.

“Risk aversion will complicate efforts to refinance lower speculative-grade issuers. The rising default rate is contributing to wider spreads at the lower end of the credit spectrum,” S&P said.

The signing of a Phase 1 trade deal to pause the 18-month trade war between the United States and China may improve investor sentiment, but will not resolve that risk aversion, the report said.

It noted a “flight to quality” following the regulatory takeover of regional lender Baoshang Bank last year that has led to persistent risk repricing.

Defaults by high-profile state-owned issuers including Tianjin-based Tewoo Group also point to a government “increasingly tolerant of defaults including by state-owned enterprises,” S&P Global Ratings China country specialist Li Chang said in a statement.

The spread on 5-year AA rated corporate debt over its AAA rated equivalent has widened by 89 basis points since May 24, when regulators assumed control of Baoshang Bank, according to Refinitiv data.

The flight to quality will also push companies to rely more on short-term funding in 2020, the report said, adding shorter maturity profiles are “credit negative” for issuers.

“We have a negative bias on most sectors in our rated China portfolio, meaning that credit downgrades are more likely than upgrades in 2020,” Li said.

Chinese issuers defaulted on payments on bonds worth more than 130 billion yuan in 2019, S&P said, topping the previous year’s record.

$1 = 6.8788 Chinese yuan Reporting by Andrew Galbraith; Editing by Mark Potter