Broader wave of de­faults feared in 2020

Muscat Daily - - BUSINESS -

Hong Kong, China – China’s big­gest health cri­sis since at least 2003 has wors­ened the out­look for de­faults in the world’s sec­ond-big­gest bond mar­ket, likely tip­ping a raft of dis­tressed bor­row­ers over the edge this year.

With scores of mil­lions of ci­ti­zens barred from travel, and com­pa­nies, fac­to­ries and re­tail out­lets shut­tered for a pe­riod of weeks, strains on cash flow add an un­ex­pected layer of stress on Chi­nese bor­row­ers. Mar­ket par­tic­i­pants had al­ready an­tic­i­pated that de­faults in 2020 would be on par with 2019, which saw a sec­ond straight an­nual record high.

“Even with the sup­port­ive liq­uid­ity poli­cies an­nounced by the Chi­nese gov­ern­ment, a very small por­tion is ex­pected to flow to those less-cred­it­wor­thy pri­vate firms,” said Wu Qiong, ex­ec­u­tive di­rec­tor at BOC In­ter­na­tional Hold­ings Ltd in Hong Kong. “Their bor­row­ing costs are ris­ing, and re­fi­nanc­ing will get even harder,” she said.

While it’s hardly a blow-out, there has been a jump in the pre­mi­ums that in­vestors de­mand to hold cor­po­rate bonds since China be­gan step­ping up its ef­forts to con­tain the coro­n­avirus in mid-Jan­uary.

“The mar­ket is fo­cus­ing on the wider mar­ket sen­ti­ment im­pact, and bot­tom fish­ing, when there is ac­tu­ally a real-world mi­cro and macro hit to the fun­da­men­tals of high-yield bond is­suers,” said Owen Gal­limore, head of credit strat­egy at Aus­tralia & New Zealand Bank­ing Group Ltd. “I ex­pect to see in­creased de­faults.”

Bond fail­ures may spread ge­o­graph­i­cally as well.

For the bond mar­ket, the in­creased strains may strengthen the trend of re­cent years, of weaker bor­row­ers fac­ing pre­mi­ums to bor­row.

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