Chinese companies use ‘virus control’ bonds to boost balance sheets

Companies across China are taking advantage of the coronavirus outbreak to shore up their balance sheets, as Beijing urges them to issue cheap bonds to support the world’s second-biggest economy.

More than 25 Chinese businesses, ranging from airlines to drug distributors, have raised Rmb24bn ($3.4bn) by selling “virus control” bonds since the start of February, according to Huatai Securities. Another 20 have announced plans to raise money in the coming weeks, as the outbreak shows few signs of tapering.

Regulators have encouraged the sales of virus-linked bonds by cutting the approval process from weeks to days while urging state-backed banks to buy them. To qualify for the programme, companies must commit to spending at least 10 per cent of the proceeds on measures to combat the epidemic, which has already led to more than 1,800 deaths and made a big dent in the economy. Analysts think China’s gross domestic product growth could fall as low as 3 per cent in the first quarter, from 6 per cent at the tail-end of last year, with a lot of industrial activity across the country currently offline.

“The coronavirus has dealt a big blow to the economy and that creates demand for stimulus,” said Ivan Chung, an analyst at Moody’s in Hong Kong. “Virus control bonds provide a solution.”

Issuers have been lured by the low cost of servicing the debt. Coupons on short-to-medium term bonds range from 2 per cent to 4 per cent. That compares with the central bank’s benchmark one-year Loan Prime Rate of 4.15 per cent. 

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“This is a windfall for us; we can’t obtain such low-cost capital from elsewhere,” said an official at Fuyao Glass Industry Group, a manufacturer that last week issued a three-year virus control bond with a coupon of 3.19 per cent. The company said that 10 per cent of the proceeds of the bond will be used to make glass for ambulance windshields.

Shenzhen Airlines, based in southern China, said last week it planned to spend the vast majority of the proceeds from a 2 per cent Rmb600m virus control bond paying off existing debt that has an interest rate of 3.1 per cent. The rest will go on refunding cancelled tickets and transporting disease control materials.

“We are one of the biggest victims of the epidemic,” said an official at the carrier, which has cancelled more than two-thirds of its flights since the outbreak began. “What we need most is to reduce our financial burden.”

The low rates on offer from the bonds have failed to lure private investors, leaving government-linked companies to absorb most of the supply. An official at the Bank of China, a major underwriter of antivirus bonds, said state-controlled lenders and brokerages are the biggest buyers. “It is our duty to give out some profits to support the real economy,” the official said. “We are doing the greater good.”

Huang Da, owner of Qianyi Investment, a Hangzhou-based bond fund, pointed to low returns as a reason for staying away. “Market forces do not support the security,” he said.

Other investors questioned the financial health of companies issuing the bonds. “There is no guarantee that disease control bonds won’t default,” said a Shanghai-based bond fund manager.

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The investor said he had passed on the opportunity to invest in a proposed five-year Rmb500m antivirus bond from Shenzhen-based Taiantang Pharmaceutical. The company’s existing debt currently trades for about 80 cents on the dollar, implying a significant risk that the money will not be repaid.



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