Broader wave of defaults feared in 2020

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.